Experts have forever preached the merits of global investing. However, in more recent times, there has been a mass movement of money away from global investments into Canadian investments in hopes of reducing currency risk and also to take advantage of Canada’s strong markets and economy.
This year may be a good time to look global again. To help you with this thinking, here are some reasons why you may want to invest globally with your RRSP contributions today.
Do what everyone is not
There’s an old saying in the investment business that says if everyone is doing the same thing and buying the same investment, then you should do what everyone else is not doing.
If you take a look at data from the Investment Funds Institute of Canada (IFIC), you can clearly see Canadian investor passion for Canadian Investments.
In 2005, the three most popular categories for new fund sales was:
- $11.2 Billion to Balanced Funds
- $8.6 Billion to Canadian Dividend and Income Funds
- $7.5 Billion to Bond and Income Funds
To contrast this, the biggest redemptions came out of the Foreign Equity to the tune of $2.98 Billion. Redemptions from Global Funds have been happening for the past 5 years since the tech bust. This year (2005) the amount of redemptions from 2004 has doubled.
You do not have to look too far to 1999 when investors were buying Global Science and Tech in droves and ignoring the things that have done well in the past 5 years like oil and gas, real estate, income trusts and
Chasing performance does not work
It is human nature to choose winning investments over losing investments but research suggests that chasing performance does not work. By chasing last years top funds, you have about a 15% chance that you will have a top fund in the following year. Translated, there is an 85% chance chasing performance will not work.
Remember that everything goes in cycles and what goes up comes down and what comes down goes up. It is inevitable that global investing will shine again.
In fact, Energy alone has contributed about two thirds of the total gain in 2005. Although the Canadian market is made up of 10 different sectors, we have become highly dependent on financials and energy. In order to get proper sector diversification, it is essential to incorporate foreign investing in your portfolio.
Foreign content restriction has been eliminated
Not only do we have market forces to consider but also now, the government has removed all foreign content restrictions. This essentially means you can invest 100% of your RRSPs into global investments. You still want to keep your portfolio diversified so 100% global may not be prudent but also make sure you don’t lose sight of having some global funds in your portfolio.
More global opportunities
That means that 97% of the opportunities exist outside our borders. Some of the best companies to invest in around the world are not in Don’t get me wrong, There’s a whole lot more to investing that that.
Global wins long term
Over the long term, data shows that global investing still wins. There is no doubt that in the short term, anything can happen. Despite the arguments, global investing does have one added risk that Canadian investments don’t and that is currency risk. Currency risk can help us but also at times, like the past few years, hurt us. Some experts suggest that it is tougher to find bargains in Canada today and easier to find them in the global markets. The bottom line is you should diversify and that means having some global exposure is better than not.
Take a look at your RRSP portfolio and find out how much is invested globally vs. domestic and make sure you have some exposure to global markets.