Here are some of the main questions you should think about as you consider moving your investments beyond Canada’s borders.
Is home bias a good thing?
If home bias means 100% of your portfolio in Canada, it’s probably a mistake. Your equity portfolio should be diversified globally with exposure to Canadian stocks, but also global stocks from the U.S., Europe and Japan. You may also want to consider emerging markets in Asia, Eastern Europe, Africa, the Middle East and Latin America.
Aren’t investors who show a strong home bias actually missing out on a lot?
It comes down to diversification and growth potential in a portfolio. There’s relatively low diversification in the Canadian marketplace, because there simply are fewer stock issues to choose from, and larger cap stock choices are somewhat limited to a few core industries.
Canada doesn’t have a lot of great technology and healthcare companies, and while our banking stocks are strong, we lack diversification in our financial services businesses. We have a lot of good companies here, but globally there are many more great companies you won’t get exposure to if you just invest in Canada.
Is investing in home companies that you know and have easy access to necessarily smart investing?
Sometimes it’s smart to invest in what you know. Warren Buffett, for example, always says he really has to understand the business he’s investing in.
Still, investing in mutual funds or ETFs that have exposure to global markets is very important, since the benefit of diversification comes not only from buying into individual companies, but also from access to the economies and broader businesses in different parts of the world.
Can being concentrated in Canadian financials and resources be a big mistake?
It’s a question of diversification. People think everything’s going to be safe until the worst-case scenario hits. U.S. financials looked like a safe bet until the fall of 2008. And people who were over-concentrated in those stocks lost a lot of money.
Diversification can help protect you from worst-case scenarios. We saw that with Nortel. In 2000, investors thought the stock was a safe investment because it had gone up for years. Then, an accounting scandal led to the company’s downfall; it filed for bankruptcy and its shares were de-listed in 2009. People lost a lot of money.
Those are great cases in point to show you need to think about diversification. It’s really a way to protect against risk.
What are the main risks associated with looking beyond Canadian borders?
#1. Currency risk
As Canadians, we understand currency moves all over the place, and recently we’ve had very volatile movements.
#2. Political risk
For example, if you’re invested in China, you have to worry about how the Chinese government might take steps to shift the value of the yuan, or whether it will ever decide to sell off the large stake of U.S. sovereign debt it currently holds.
When you buy foreign investments, many times you have withholding tax on dividends, which means you lose a lot of the tax-efficiency that normally comes from dividend income.
#4. Capital market integrity
Certain global markets don’t give you the same levels of assurance and confidence that you get from Canada, the U.K. or the U.S.
How does the global economic climate relate to home bias?
It has an impact, because if Canada is moving faster than any other market, people will say, “Why do I want to bother looking beyond our borders?”
However, Canada’s success may not last forever. Investing globally means having access to returns from multiple markets.