Most of us make the same ‘mistake’. We invest with a home bias. You will see many estimates that show Canadians investing some 50% or more in the Canadian stock markets. What has been the cost to the Canadian investor? A quick look shows that a Canadian portfolio home bias has not hurt the Canadian investor to the degree that we might suspect.
I’ll cut to the chase. Here’s a look at a Canadian home bias portfolio vs a more well-diversified portfolio. The Canadian portfolio also makes mistake #2 – no foreign stocks beyond the US market. That is a common stance of investors who favour local markets. They will have some confidence in the US (our neighbours) but very little interest in ‘going overseas’.
If we look at the comparison in a time-weighted evaluation over the last 10-plus years it looks like this. The period is January of 2009 until the end of November 2019. This is the period of the longest bull run in US stock market history.
We are using a Balanced Growth model, the portfolio is re-balanced on an annual basis. The chart is courtesy of portfoliovisualizer.com.
Yes, we see identical returns.
But investors don’t invest like that.
Investors don’t often drop in a certain amount and then walk away. No, in the accumulation stage we invest on a regular schedule. In this scenario, we’ll start with that same $10,000 and then we’ll invest $1000 per month. There is a slight advantage for the non-Canadian-bias portfolio. That portfolio delivered an additional $5000.
And of course the true test of investing is the performance through market cycles. Let’s run the test from 2007, including the last major market correction. You predicted a tie again, didn’t you?
The North American bias portfolio holds up. But keep in mind that the ETFs used in the example are currency hedged. The historical performance would be dependent upon the level that an investor would currency hedge, or not hedge.
And the US Dollar has been the strongest currency of the bunch (not surprisingly) during the period of the US stock market’s longest bull run.
The EAFE basket has been weak against the US dollar. This chart that I was able to find was through 2017.
A Canadian investor would have received a greater currency benefit courtesy of the non-hedged US equities vs the non-hedged EAFE index funds. That said, there would have been a slightly benefit to that EAFE currency exposure for the Canadian investor.
Did a Canadian home bias hurt the Canadian investor?
That depends. It depends on the period and and it depends on the currency exposure. Again if a Canadian investor had a home bias but compensated with some US exposure (non currency hedged) they may have ‘gotten lucky’.
And the recent currency win or lose scenario will have nothing to do perhaps with your decision moving forward. We have no idea what will happen with respect to the Canadian Dollar vs US Dollar vs EAFE currencies. But you make make an informed choice moving forward.
And these are important considerations for the US investor as well. Over the longer term US investors would have benefited from international currency exposure. The chart below is from this wiserinvestor post.
Be Canadian on the currency question?
The common suggestion for Canadian self-directed investors is to not currency hedge. It may make sense to uh, hedge your currency bets? You might play it down the middle in good Canadian fashion. You may invest in both currency hedged funds and non currency hedged funds. That chart above shows currency exposure benefit over the longer term. In the short term currency exposure could bite back. Pension funds and private wealth managers will be very careful with their foreign currency exposure. Us couch potato investors? Often, not so much.
The net net.
A Canadian home bias may not have ‘hurt us’ much, depending on all of the moving parts. But of course, it makes sense to cover the weaknesses of the Canadian market with US and International equities. We should remember that we won’t get it perfect. We don’t have to be perfect. Just do it. Do it in a sensible well-diversified fashion within your risk tolerance level.
Weekend Reads.
Hey let’s kick it off on a downer. Once again Canada’s most famous economist is calling for another recession. David Rosenberg in the Globe suggests an 80% chance of a recession in 2020.
We’ll see how his 2020 vision is working. Let’s check back with Rosey in 2021.
And we can knock off so many great links and reads with Mark Seed’s Weekend Reads Post. Thanks Mark, that saves me a lot of time, ha.
On findependencehub Jonathan Chevreau recaps his MoneySense review of the Sleepeasy Retirement Guide from David Aston.
Milliondollar journey offers a Questwealth review.
Mutual fund deferred service charges DSC’s will be banned across Canada but not in Ontario, yikes. Ontario Premier Doug Ford offers an absolutely ridiculous explanation. Obviously Mr. Ford would not know an ETF from a mutual fund. But he responded when mutual fund executives took him our for a nice dinner to cry on his shoulder.
On Twitter Mike The Dividend Guy reported that his DSR Dividend Stocks Rock service did some incredible market thumping.
Gordon Pape’s concentrated portfolio is blowing past expectations.
And here’s your year end checklist from savvynewcanadians.
Fritz of retirementmanifesto offers his top ten posts of 2019.
Happy holidays. As always thanks for reading and sharing the posts. Thanks for your comments in the posts.
Dale
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