I've read that Canada represents only four per cent of the world's stock market capitalization. Yet, every Canadian I know with an investment account holds a much, much higher percentage in Canadian stocks. I know the common thinking is that Canadians have to have some exposure to U.S. and global markets to have a properly diversified portfolio. But more than 50 per cent of my stock holdings are Canadian shares. Is that too much? Am I being less than smart about my investments? Would I be wise to cut back my Canadian exposure to, say four per cent or a little more, to have proper exposure to the equity market in general?
The answer all comes down to knowing what you own. It is true that most Canadians probably have the majority of their investments in Canadian-based holdings. It would be because we are familiar with the companies that we patronize and see in our day-to-day lives. It is a lot easier to understand why one would invest in one of the banks that we deal with and have a direct interaction with. Fortunately, we learnt from the credit crisis that our Canadian banking system is the safest one in the world.
I believe in not only knowing what you own, but having an understanding of the product or service that the company provides. Canada is a successful country so we are lucky that is it not harmful to overweight one's portfolio with Canadian investments. Certainly global investing is equally important especially in the U.S. markets. Many of the companies are connected to the global economy so indirectly you are already investing in parts of the rest of the world.
For example: Our resource companies sell their raw materials to foreign countries. If production in the foreign companies increases because they are doing well, then we benefit because they increase their orders from us for the raw materials.
We are equally affected when other economies around the globe not only flourish but falter.
The other thing to take into consideration is that we are taxed in Canadian dollars and we spend usually in Canadian dollars. There is the benefit of the tax credit given on dividends from Canadian corporations. In most cases there is a non-residency withholding tax deducted from foreign investment income that lowers your yield, (with the exception of U.S.-based company stocks that are held within a retirement account).
You have to be cautioned and aware of the foreign exchange risk that exists when you own a stock that trades in a currency other than Canadian dollars. Ultimately, you have to convert any income and gain back into Canadian dollars. Depending on the strength or weakness of the dollar from when you made a purchase to when you sell it can either increase or decrease your gain.
Certainly consider diversifying your portfolio geographically, but focus on the economy of that country and how you get that exposure. There are many country and region-specific ETFs and mutual funds that you can use to invest that way.
You don't necessarily have to invest in every country in the world, only in the areas that you think are growing where your investments can grow too.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can send your questions to email@example.com as well.
It would be like betting on all horses running at the race track. In the end you'd end up breaking even instead of ahead.