One of the most common investing mistakes Canadians make is to over-emphasize domestic stocks and downplay markets in the United States and internationally.
If you've been ignoring advice to diversify beyond Canada, here's some incentive to change your mind. At a time when so many assets are expensive, international stock markets are a comparative bargain.
A recent column looked at some analysis by portfolio managers PWL Capital on which assets were expensive, fairly valued and cheap. PWL believes in building diversified portfolios that include all or most major asset classes, and not in timing based on what's expensive and what's cheap. So if you're building a portfolio today, you will need to include some assets that can be considered expensive.
International markets – those outside North America – are where you get to buy at better prices. PWL's analysis shows European and Pacific markets to be fairly valued and emerging markets to be modestly cheap. You'll also want some U.S. exposure, even if that market has been flying in recent years. "The U.S. is a little expensive, but it can get way more expensive," said Raymond Kerzérho, director of research at PWL. "People started saying the U.S. market was overpriced back in 1996 and the market continued on its way up to 2000."
The precise mix of Canadian, U.S. and international stocks isn't particularly important, as long as you don't shortchange any one region with just a token weighting. Investing one-third of the stock market exposure in a portfolio in each region is fine, and so is having 20 per cent in Canada and 40 per cent each in the U.S. and international markets. One argument for retaining a larger Canadian holding is if you have a non-registered portfolio and want to take advantage of the dividend tax credit.
Mr. Kerzérho suggests an easy way to make sure you have emerging markets included in your portfolio. Simply buy an exchange-traded fund that invests in the entire global market and not just in the stocks of developed countries. Examples are the Vanguard Global All Cap ex Canada Index ETF (VXC), and the iShares Core MSCI All Country World ex Canada Index ETF (XAW). Both are a complete global package with about half their assets in the United States and the rest spread around the world.