With the monster weighting our stock market has in oil and mining stocks, that's been the investing story of the past decade. Global investing? Strictly for suckers who bought into the theoretical benefits of diversification and ignored what was actually happening in the world.
It's time for a rethink now, and not just because one of the most basic investing rules is that no trend lasts forever. In fact, there are five good reasons to build up your exposure to global markets:
1. The Canadian market is dangerously lopsided.
Of the top 10 largest stocks in Canada, nine are banks or resource companies. That's our stock market: Rocks and Bucks R Us.
In fact, financials, energy and materials (basically mining companies) account for almost 80 per cent of the S&P/TSX composite index. Once thought of as volatile and speculative, energy and materials have grown in influence to the point where they alone account for 50 per cent of the index. That defies common sense diversification.
There are plenty of great Canadian companies in other sectors, but investors aren't much interested. They keep pouring money into banks and resource companies, which in turn reinforces their stock market dominance and susceptibility to a fall.
2. The Canadian market is sadly deficient in some sectors.
Here are two notable examples: Health care, which accounts for 1.25 per cent of the S&P/TSX composite, and technology, which accounts for 2.3 per cent. We're a technology-obsessed society, and an aging population that will spend increasing amounts on health care. Yet our stock market barely acknowledges this.
Globally, it's a much different story. The most heavily-weighted sector on the S&P 500, the most-watched U.S. index, is technology at almost 18 per cent, while health care comes in fourth at 11 per cent.
Investing globally gives you the chance to own the likes of Apple, whose shares are up a cumulative 400 per cent in the past five years. It can also give you exposure to the hefty dividends and bear market sturdiness of health care companies.
3. The dollar is your friend.
Ten years ago, the Canadian dollar was worth about 65 cents (U.S.). The currency's long climb to levels above par with the U.S. dollar is one of the big reasons why investors have either made nothing or lost money in U.S. equity funds and global equity funds, most of which have large U.S. weightings.
A rising dollar erodes returns in other currencies, but you don't have to worry about that right now because the long-term outlook for our currency is lower, not higher. It may take a while - years, even. But when our dollar slides, it will turbo-charge your returns from U.S. and global equity funds.
In the meantime, so high is our dollar right now that you can convert it into American funds and still get more than $1 (U.S.), even after those egregious foreign exchange fees are applied. You might say U.S. dollars are on sale right now, limited time only.
4. History is your friend.
No one talks much about it now, but there was a time when Canada regularly had its butt kicked by the rest of the world. The year 1998 is a classic example. While the average Canadian equity fund lost 3 per cent, the average global equity fund delivered a gain of 15.4 per cent.
In fact, the decade of the 1990s saw global funds outperform Canadian equity funds in six of 10 years. Long-term numbers offer a further argument for global investing. The average annual return for the S&P/TSX composite over the 30 years to March 31 was 9.1 per cent, while the S&P 500 made 10.1 per cent in Canadian dollars and the MSCI Europe Australasia Far East Index averaged 9.1 per cent, again in Canadian dollars.
5. Global funds have busted out of their slump.
The 10-year numbers from global equity funds are pure financial poison. We're talking about a compound average annual loss of 0.02 per cent, which would have turned a $1,000 investment into $998. An investment in the average near zero-risk money market fund would have left you with $1,207 over the same time frame.
Today, global equity funds are on the move. Year to date, many of the biggest names are up about 4 per cent. For the 24 months ended March 31, the average annual gain for the category was 18 per cent.
The S&P/TSX composite index made 23.3 per cent annually over that same two-year period, and its 10-year average annual return was 8.9 per cent. Investors who like to buy low, where will you put your money? Canada or the world?
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