Don't follow the pack when it comes to investingMay 29, 2017
Following what your neighbour does, it not a recipe for success in the investment world. Most of us have a bias to Canada, it is the “buy what you know” strategy, which is great in many aspects of life. The problem arises when it comes to investing; sometimes what you don’t know is better than what you do know. Home-country bias can result in missed opportunities as it ties you completely to your own economies economic cycles, inflation, and monetary policies and eliminates access to opportunities elsewhere on the globe.
Investing at home can be especially attractive to Canadians because of our relatively strong and stable economy. But are domestic investments always the right choice? Before putting too many eggs in one basket, consider the risks and rewards of where you choose to invest.
Investing too heavily in the Canadian economy
The Canadian economy, while probably most familiar to us, is relatively homogeneous. Three sectors – financials, energy and materials – make up nearly 70 per cent of the Canadian stock market.1 This much concentration can potentially pose risks.
97% of your investment opportunities lie outside Canada’s borders
Picture the three sectors as pillars. If most of our economy rests on just three pillars, and one weakens, the entire structure wobbles, as recently demonstrated by Canada’s oil industry. The oil crisis in 2015 affected the entire Canadian economy, and the resulting downturn is far from over.3
The second limitation is that our economy is comparatively small on the global scale. Canada represents approximately 3% of the world’s markets. Going beyond our borders provides access to more top companies in all sectors.
What does this mean in practical terms? Say an innovation in the auto and truck manufacturing sector catches an investor’s eye. The world’s largest auto and truck manufacturing companies are not in Canada, but in Japan and Germany.5 To gain exposure to the latest developments in this sector, the investor should look beyond Canada’s borders.
The upside potential of going global
Investing across the world makes us less vulnerable to the ups and downs of one country’s economy. According to Todd Millay in Forbes, “Owning both domestic and international stocks reduces the overall volatility of the portfolio since they do not move in lockstep. This diversification improves the risk-adjusted returns of a stock portfolio.”6
Emerging markets’ rapid rate of growth is another reason to invest abroad. Chinese and Indian economies are typically growing much faster than their North American counterparts. Globalizing your portfolio gives you direct access to that growth.7 Investors with global exposure could be in a position to benefit from a wider range of potential upsides
That’s the basic premise behind diversification – it helps reduce risk and increase investment opportunities. Going back to the pillar analogy, a global portfolio rests on dozens of pillars across multiple industries and geographies. If one or two pillars fail, the portfolio is still well supported by many others.
How much to invest?
One theory of diversifying globally suggests investing domestically in proportion to your country’s market capitalization versus the rest of the world.8 This means that Canadians should be investing just over three per cent of our portfolios’ equity portion in Canadian companies, and the rest globally. In more realistic terms, however, determining the right amount to allocate globally depends on an investor’s time horizon, risk tolerance and financial goals.
Speak with an advisor
Investing a portion of your money globally provides access to the broadest spectrum of funds and is an essential component in your portfolio. Our goal is to provide you with the optimal exposure to the right funds, in the right allocation, at the right time. The new realities for investing call for global strategies. We think both globally and locally, relentlessly manage risk, and always place your interests first.
Financial Strategist at Savanti Wealth
Want some more information? Send us an email or give us a call and we can help you at firstname.lastname@example.org or (403)968-8443
1 Morningstar Direct, October 31, 2016.
5 www.forbes.com/global2000/list/6,7 www.forbes.com/sites/toddmillay/2016/02/10/think-strategically-invest-globally-2/#6c0a965079b2
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