Investors around the globe are known to invest with a home bias. That is, due to familiarity investors allocate too much to their home country. Canadians will typically hold more Canadian equities compared to US or International equities. Meanwhile Canada represents only 3% of the global economy.
And OK, I’ll lead off with my personal admission – I have a considerable home bias for my personal portfolio. I’m guilty. I am like most Canadians. In my wife’s portfolio things are more in order. She holds more US stocks compared to Canadian. We both have some bonds in the mix to sit in that Balanced Growth Sweet Spot.
This week on The Globe and Mail Ian McGugan offered Sorry Canadians, your stay-at-home approach to investing isn’t as logical as you may think.
Mr. McGugan then goes into the psychology of why too many Canadian investors feel comfortable wrapping their portfolio in the Maple Leaf flag.
Where are you supposed to put your loonies? In a U.S. market that appears, in some eyes, to be verging on a recession? In Europe, where Brexit is likely to keep nerves on edge for months to come? Or in Asia, where China’s attempted clampdown on Hong Kong could spiral into something far uglier?
The tariff war between the U.S. and China, a slowing German economy and worries about China’s mountain of debt add to the potential risks of international investing. Small wonder, then, that many Canadian investors stick close to home, clutching a handful of familiar names in their portfolios.
But that home bias has been costly in recent years. Here are the returns of various countries and regions for the last 5 years.
Yup. Canada has been the laggard and then some. The TSX 60 (XIU) that you’ll find on the Cut The Crap Investing Model Portfolio Page has done a little better than the Composite, but not enough to catch those other countries or regions. And as that Globe article points out the reason for the Canadian under performance is falling energy prices and energy prices that seem to be going nowhere in a hurry. I am not one to make predictions, but in 2014 on Seeking Alpha I attempted to outline a reasonable educated guess for a price range for oil. I had suggested that we were in a new oil price paradigm, with the likelihood of oil prices that languish in the $50-60 range.
Oil companies might struggle. Countries that rely on resources might struggle. That oil price ‘prediction’ turned out and so did the struggle for a country such as Canada, at least with respect to stock markets.
Canada does not make for a sensible investment ‘on its own’. It’s simply too concentrated in financials and resources and materials. Here’s the breakdown for the TSX Composite.
The Canadian markets is largely missing some important sectors such as consumer staples, consumer discretionary, healthcare, technology and more. Here’s how you fill that gap, with the US market.
And International funds such as iShares EAFE, Europe Australasia and the Far East …
Many will suggest that you top up that Real Estate REIT exposure as well.
All said the performance of the Canadian market over the longer term is quite solid. Here’s the TSX 60 XIU from inception delivering an average of 7% annual moving through 2 market cycles. But that is not ammunition to ignore that US and International diversification.
Here’s the hypothetical back-tested couch potato portfolio returns courtesy of Justin Bender and his Canadian Portfolio Manager blog. The column on the left begins with a portfolio at 20% stocks, with the far right column at 100% stocks. The equity asset mix is in the range of 38% US / 33% Canada / 29% International.
Canadian stocks performed well enough through the last 2 market cycles, but that does not guarantee that we will see a repeat. Again, Canada relies on just a few sectors. We could debate all day on the optimal asset allocation. I’d simply suggest that you have a nice mix of Canadian and US and perhaps shade in some International including developing markets. There’s certainly nothing wrong with the even split of the index-based Tangerine Portfolios. The Equity Growth Portfolio did have a Canadian home bias at launch in 2011, but that was ‘fixed’ in 2016 at the time of the launch of their Dividend Portfolio.
Use those core building blocks.
Weekend Reads
On Boomer and Echo Robb Engen looks at a retirement funding model put into practice for a Wealthsimple client. Once again, we have another demonstration of advice in concert with low fee index-based portfolios at one of Canada’s Robo Advisors. It’s certainly important that the Robo’s have the advisors on hand to assist the growing number of Canadian retirees.
On myownadvisor Mark Seed offers Income Investing and my Retirement Strategy. And while we’re on that retirement funding strategy I had posted Living Off Of The Dividends To Create Retirement Income.
On Canadian Couch Potato Dan offers up on Horizons move to a corporate structure for their swap-based ETFs and this on the ‘re-allocation’ and slight fee drop on the TD e-series funds. Am I the only one who see the terrible irony in a big bank lowering the fees by .05% on funds that are already in the lower fee camp? What about the funds at 2.5%? There’s a bit more fat to trim there.
On FindependenceHub here’s an interesting article on Lazy Ways To Earn Money In The Sharing Economy. I’ll have to look at that for the Winter so that I can get out of the house and earn a buck or two.
milliondollarjourney takes a look at those dividend achievers, aristocrats and dividend kings (companies with a 50 year history of dividend increases).
In this post Mike The Dividend Guy explains why he invests monies as soon as he has them to invest. He does not time the markets. Timing simply doesn’t work. Invest ’em when you got ’em I always write.
And on Seeking Alpha I had suggested that thanks to 10 years without a major market correction Our Perception Of Our Risk Tolerance Level Is Out Of Whack.
Thanks for reading, have a great weekend. Thanks for sharing this blog and this article, and please leave your comments and suggestions.
Dale
