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A man checks global stock index in Tokyo (Koji Sasahara/AP)
A man checks global stock index in Tokyo (Koji Sasahara/AP)

Investor Clinic

Investing abroad: Should I stay or should I go? Add to ...

How much foreign exposure should you have in your portfolio? Fifty per cent? Thirty per cent? None?

If only there were a simple answer.

With the Canadian dollar trading at more than 96 cents (U.S.), some investors say it's an ideal time to take advantage of the loonie's strength by shopping for stocks abroad.

On the other hand, with Europe battling a debt crisis, Chinese stocks in a bear market and the U.S. economy still beset by high unemployment and weak housing prices, there are plenty of reasons to keep your money at home.

No wonder some investors are confused.

To shed some light on this dilemma, Investor Clinic spoke to three investors. One makes the case for investing solely in Canada. This, after all, is the country we know best. There are also compelling tax and currency reasons for investing at home.

The other two investors take the view - espoused by many portfolio managers - that investments should be diversified globally. Investors who shun global markets risk missing out on the potentially higher returns available in developing economies, they say.

We'll start with the Canada-only approach.

Tom Connolly, publisher of the Connolly Report newsletter in Kingston.

Mr. Connolly's approach couldn't be more straightforward: He invests in Canadian companies with a track record of raising their dividends. His holdings include TransCanada Corp. , Leon's Furniture Ltd. , Canadian National Railway Co. and Enbridge Inc.

He sticks to Canadian stocks for a few reasons. First, when held in a non-registered account, dividends from most Canadian public companies qualify for the dividend tax credit, so they're taxed at a much lower rate than interest income. Foreign dividends don't get this special treatment.

Second, because he lives in Canada, he knows the companies he invests in. If he were to invest abroad, he wouldn't have enough knowledge to be a stock picker, which means he'd have to pay a fee to invest in a mutual fund or exchange-traded fund.

Read more: Diversifying your portfolio

  • Why you should diversify
  • It's time to rethink what diversification means
  • Tread carefully on foreign shores
  • The seven deadly sins of managing your money
  • Managing market instability: Diversify – and rebalance
  • A strategy for smart diversification

Third, even though Canada has a narrower selection of stocks than the U.S. or Europe, he says he can get all the diversification he needs by spreading his money across different industries. Besides, stock markets around the world often move in lockstep, minimizing the benefits of diversification, he adds.

Finally, because he pays his bills and goes shopping with Canadian dollars, he doesn't want to take the risk of investing in foreign currencies such as the U.S. dollar and euro.

He knows his strategy goes against conventional wisdom, but he doesn't care. "I'm a contrarian going way back and I think you have to be a contrarian to succeed," he says.

Constantine Kostarakis, portfolio manager with Pfiffner Management in Montreal.

Canada makes up less than 5 per cent of global equity markets, so investors who don't put some money to work abroad are doing themselves a disservice, Mr. Kostarakis says.

"If you want to increase your overall potential rate of return, emerging markets are growing a lot faster," he says.

Because three sectors - energy, materials and financials - account for about 77 per cent of Canada's benchmark stock index, investors need to go abroad to get exposure in underrepresented sectors such as technology, consumer staples and health care.

Not being familiar with foreign companies is no excuse for keeping your money at home, he says. The proliferation of low-cost exchange-traded funds, many of which offer currency hedging, makes it easy to diversify globally without worrying that swings in the loonie, euro or U.S. dollar will crush your returns.

Some of his favourite currency-hedged ETFs include the iShares U.S. IG Corporate Bond Index Fund , iShares MSCI EAFE Index Fund and the Claymore Global Monthly Advantaged Dividend ETF .

Typically, his client's portfolios have 30 to 40 per cent of their total assets in foreign stocks and bonds, made up of a mixture of hedged and non-hedged products.

"I like a little bit of both," he says. "The Canadian dollar has done very well, thank you very much, but it doesn't mean it will [continue to outperform]in the future."

Ric Palombi, portfolio manager with McLean & Partners Wealth Management in Calgary.

Like Mr. Connolly, Mr. Palombi's firm looks for solid dividend-paying stocks. Unlike Mr. Connolly, it goes all over the world - not just Canada - to find them.

"Canada certainly has its place," he says. "But we definitely want to invest in the best companies in the world regardless of where they are."

The firm's model balanced portfolio is about 58 per cent in equities and 42 per cent in bonds. Of the equity portion, about 30 per cent is in Canada, with the rest spread across the United States, Europe and emerging markets in Asia and Latin America.

International holdings include generic drug maker Teva Pharmaceutical Industries Ltd. of Israel; directories publisher PagesJaunes Group SA of France; and German auto maker Daimler AG .

Many investors prefer to hedge their currency exposure when putting capital to work abroad, but McLean & Partners is comfortable taking currency risk. The Canadian dollar has already had a huge run, so a big rally from these levels is unlikely, he says.

"If you look at the Australian experience, the Australian dollar had a big run heading into the rate increases [last fall] But if you look at what it has done since then it has not done very well and they have raised rates significantly," Mr. Palombi says.

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