Staying Balanced in the Financial Services Sector

By James Shanahan October 11, 2017

Balanced weght

For some Canadians, true happiness is a summer spent relaxing at the cottage, visiting with friends and family or exploring new destinations. With the lazy days of summer now over and families recent return from well-deserved vacations, many may not have thought much about their investment portfolios in recent months. As temperatures begin to drop and families return to their regular routines, now is an excellent time to meet with your Edward Jones advisor and review your portfolio for risks and opportunities. Consider the following:

Portfolio Rebalancing. As illustrated in the chart below, the S&P/TSX Index is dominated by stocks within the financial services sector. Financial services stocks alone make up approximately 35% of the TSX as of June 30, 2017. Five of the top ten members of the index are financial services stocks. While strong financial performance and rising dividends continue to attract significant investor interest, many investors may find, however, that they are now significantly overweight in financial services stocks.

Sector weightings chart

Source: Bloomberg, 06/30/2017. The S&P/TSX Index is an unmanaged index and cannot be invested in directly. Diversification does not guarantee a profit or protect against loss in a declining market.

Subsector Diversification. After considering appropriate allocations to stocks across various industry sectors, investors may also want to consider allocations within sectors. Options within the financial services sector include banks, asset managers, life insurance and property & casualty insurance. Investors in the financial services sector are often overweight in bank stocks but underweight in stocks of the non-bank financial services companies. By diversifying further within an industry sector, investors could potentially increase long-term returns while reducing overall risk.

Our Recommendations. Canadian financial services companies, particularly the large banks, have been strong performers over the last 10 to 15 years and have earned a spot within the portfolios of many Canadian investors. If you haven't already done so, we believe now is an excellent time to meet with your Edward Jones advisor to review portfolio risks and opportunities. Within equity portfolios, we recommend a 20% allocation to financial services. If the financial services weighting is materially different than 20%, rebalancing should be considered. Furthermore, we recommend that investors consider diversification by subsector. In addition to owning stocks of Canadian banks, investors may want to consider adding stocks of asset managers and insurance companies to help increase return potential and help reduce overall risk.

Important Information:

Diversification does not ensure a profit or protect against loss. Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.

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