Real Estate mantra is Location, Location,Location

OTTAWA - If real estate's mantra is ``location, location, location,'' investing's is ``diversify, diversify, diversify'' - even if recent market uncertainty has encouraged Canadian investors to keep their money close to home.

``Investors can be forgiven for asking to be reminded again of the benefits of diversification, given current market events,'' say deputy chief economist Douglas Porter and economist Robert Kavcic of BMO Capital Markets, who add that while recent equity market weakness has called the time-honoured message into question, compelling cases can be made for diversification both within and across asset classes, as well as for investing outside the country.

The kind of steep sector declines that happened with the technology bubble, the ``frenzy'' in housing-related stocks and the meltdown in the U.S. financial sector make their own case for diversification, the pair argue. But even in a market like the current one where, for example, U.S. bank, auto and materials stocks have declined but consumer services, utilities and pharmaceuticals have made solid gains, diversification performs the valuable task of spreading out risks and reducing overall portfolio volatility.

``The case for size and style diversification is somewhat less compelling, but an investor can tick off all of these boxes by holding a diverse basket of equities spread across multiple sectors,'' Porter and Kavcic write.

As far as diversifying by asset class is concerned, they note that Treasuries are seen as a ``go-to safe haven,'' acting as a hedge when the markets are under pressure. Gold prices tend to be less affected by the ups and downs of equities, and commodities serve as a ``very good hedge against poor equity market performance.''

It's also important for Canadian investors to let their money travel, the economists say.

``Amid the hydra-headed European debt crisis, the deteriorating U.S. fiscal landscape, Japan's multi-decade funk, and fears over a hard landing in China, it's understandable that Canadian investors would stay close to home,'' they say, and add that in the past decade, when Canadian equities were outperforming their counterparts, it might have made sense.

But now, ``even with Canada's relative safe-haven status, the TSX has trailed far behind U.S. equities his year, and lagged even Britain and some other key markets.'' As well, they note there's a risk that the TSX will underperform in the years ahead.

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