Who doesn’t love Canada eh? But (Sorry) ..this past week has reminded us again that having too much of Canada in your investment portfolio can be a detriment to your long-term savings. That's because despite good overall economic results in Canada, the performance of Canadian equities in particular have been poor recently. Investing more of your investment portfolio in non-Canadian investments will not make you any less a proud Canadian and may make for better overall results.
Home Bias investing can actually be riskier and lead to poorer returns overall
Investors in most countries have a home bias-a preference for domestic securities over foreign securities. There was a time (until 2005) in Canada, where there were restrictions on how much foreign content one could hold in an RRSP. Many Canadians have not adjusted since those restrictions were eliminated. Other Canadian investors just have a “home bias” towards the Canadian names that they recognize being in their portfolios. A 2014 Vanguard survey found that 60% of the average Canadian equity portfolio consisted of only Canadian equities. The same survey noted that equity portfolios made up of a single country may deliver expected returns too low for the level of risk they take.
Canada is big but also small
In countries with a large and diverse domestic market exists, the implications of a "home bias" may not be that significant but in Canada where equity markets are highly concentrated in certain sectors the impact can be significant. That's because while Canada maybe the 2nd largest country in the world geographically, it only accounts for about 3% of the entire global market of publicly traded stocks.
Even the Canada Pension Plan Investment Board (CPPIB) has realized this and only holds approximately 30% of its investments in Canada. Owning too much “Canada” provides less geographical diversification but also sector diversification than suggested. The Canadian economy is heavily concentrated in 3 sectors: Materials, Energy and Financials. Together, these 3 sectors account for approximately 67.2% of our entire market as represented by the index. Technology as it stands now, only represents about 3% of the TSX Composite. The US market by comparison, which accounts for almost half of the global market overall is fairly well diversified across each sector from technology to consumer goods/services to biotech and industrials.
Holding onto too much of Canada instead of other global equities means you may be missing out on gains elsewhere. Investing only in the S&P/TSX Composite may have provided a return of 26% but the American S&P 500 was up 70% over that time. When you consider the fact that some of your non-portfolio assets like your home or cottage are also Canadian assets that will rise and fall in sync with Canada’s economic fortunes you may have way too much invested in Canada.
Do you know how much you have invested in Canada ?
Meeting with a financial advisor and understanding where you are invested is a good first step which may lead to a rebalancing of your portfolio if appropriate. By no means does rebalancing mean that you have to go overboard with reducing Canadian investments as Canada does have many great companies to invest in and there are tax considerations and currency considerations to be considered. However, it may mean that your portfolio should be rebalanced by looking further afield because a globally diversified portfolio will have lower volatility than an undiversified portfolio and should produce greater returns.
As always, I am always happy to provide a 2nd opinion or review of your investment portfolio. As an independent Certified Financial Planner I work in an unbiased way for clients not for a large financial institution.