Domestic bias

Most investors around the world face domestic bias. In other words, people tend to invest in companies in their own country. Canadians are certainly no exception to this rule. The Canadian stock market represents about 4% of the total global stock market yet Canadians overwhelmingly invest in Canadian companies.

According to market capitalization

One theory to the amount of global investments you should have in the equity portion of your portfolio is to simply follow the allocations of the global markets according to market capitalization. In this case, investors would only put about 4% of their total investment assets in Canada. 43% would be allocated to US companies, 42% to developed international companies and 11% to foreign emerging companies. Holding an allocation like this would theoretically maximize the efficiency of a totally global portfolio.

While this allocation may be efficient from the perspective of modern portfolio theory, to many Canadians this guideline would appear to be too extreme especially when global investments really haven’t performed for the past 8 years.

The currency factor

Currency can play a significant factor in how much of your investment portfolio you allocate outside of Canada. Since Canadians are paid in Canadian dollars and also spend in Canadian dollars, it makes sense for Canadians to invest in Canadian dollar based investments. Investing in Canada removes any currency issues that can exist from time to time. In fact, investing in Canada in the last In the last 5 years was ideal timing since the Canadian dollar has been so strong especially against the US dollar. The strong Canadian dollar has made performance from global investments to look a lot worse than it has been.

While currency can increase risk of having more global exposure, it is possible to counteract that risk by hedging currencies. Hedging the currency effectively removes any fluctuation of performance resulting from changes in currency.

The right balance

Most financial advisors like David Porter, Porfolio Manager for Sanders Wealth Management, would tell you that the right allocation for each investor depends on personal circumstances like risk tolerance, time horizon, and overall objective of the portfolio.

Porter reviews allocations periodically to set reasonable targets for domestic and global investment allocations, “Currently our foreign allocations range between 30% to 55% for the equity portion of the portfolio.” This is much more conservative than having 96% global.

My two cents

There is no perfect answer when it comes to determining how much money should be invested outside of Canada. Although it has been favourable since 2000 to have more Canadian investments because of currency and the strong performance of the TSX, nothing moves in a straight line for a long period of time. If you believe that stock markets, currencies, and economies move in cycles, then the next 10 years might reward investors who allocate more money outside of Canada. The bottom line is I think you should invest more money globally than you think and probably have.

It was not long ago in the 1990’s when global investing was actually trendy. The Canadian market was considered small and relatively narrow. If you wanted to invest in resources, then Canada was the place to be but for most other things, like technology, health care, manufacturing, etc, there was many other places around the world to invest. And just when everyone was giving up on Canada, the cycle turned.