Pretty much everyone agrees on the importance of diversification in building portfolios, but the consensus falls apart after that.
The truth of diversification is that there is zero standardization. To prove it, let’s look at the question of how much Canadian stock market exposure to have in a portfolio. Next to the overall stocks/bonds breakdown, this is may be the most important matter of diversification for investors to answer. All stock markets have plunged lately, and the S&P/TSX Composite Index and Nasdaq Composite Index were in a full-on correction at one point this week. But if you look at the past several years, Canada has been a dismal performer. Without some exposure to stocks in the rest of the world, notably the U.S. market, you would have missed out.
Here are four views on how much exposure to Canadian stocks to have in a portfolio:
- The MSCI World Index: A well-followed benchmark for global stocks. Canada has a weighting of 3.2 per cent, which makes it the sixth-largest equity weighting. The United States dominates with a 62-per-cent weighting.
- Balanced exchange-traded funds: The Vanguard Growth ETF Portfolio (VGRO-T) has a 24-per-cent equity weighting to Canada, compared with 32.2 per cent for the U.S. market and 18.8 per cent for international; the iShares Balanced Growth CorePortfolio Index ETF (CBN-T) has 19 per cent of its assets in the Canadian stock market, with most of the rest in the U.S. market as well as international and emerging markets.
- Robo-advisers: Invisor Balanced Growth Portfolio has a 3.1-per-cent weighting to Canada, with 35.6 per cent in U.S. stocks and 25.8-per-cent exposure to international stocks; the BMO SmartFolio Equity Growth Portfolio has a 19-per-cent weighting in Canadian stocks, with the rest mainly in the U.S. market.
- Balanced mutual funds: The Beutel Goodman Balanced Fund has a 32.4-per-cent weighting to Canadian stocks, compared with 16.5 per cent for U.S. stocks and 19.4 per cent for international. The fund has been a top-quartile performer in the past three-, five- and 10-year periods to Sept. 30. The Steadyhand Founders Fund had 49 per cent of its stock market holdings in Canada, compared with 25 per cent for the United States and 26 per cent internationally.
There’s a clear preference shown here for giving Canada a significantly bigger weighting than it gets in the MSCI World Index, which makes sense because we live in Canada and will spend Canadian dollars in retirement. Note as well that none of the portfolios listed here gives Canadian stocks a dominant allocation. A simple way to translate all of this to your own portfolio: Even equity weightings between Canada, the U.S. and international markets. Add a weighting of bonds suited to your personal situation and you’ve nailed the essence of diversification.