‘Diversification is the only free lunch’ is a common investing notion. We manage the sector, geographic, currency risks and volatility (to name a few). Our asset allocation decisions mostly determine our returns and our portfolio volatility. Our key decision will be our ratio of stocks (growth) vs bonds (defense). And then, where do we get those stocks and bonds? Many (perhaps most) have endured underperformance vs a global portfolio due to an extended Canadian home bias. Others may have suffered due to a concentrated stock portfolio that lacks diversification. Many investors will have missed the mark (or market) on both counts – a concentrated stock portfolio and lack of geographic diversification. We’re looking at your asset allocation on the Sunday Reads.
And here’s a Tweet that sums up the Canadian home bias hurt of the last 2 years.
But as I pointed out two weeks ago, if you step back – Canadian stocks are better than you think. They moved to new all-time highs, but there is no denying the long-term underperformance vs U.S. stocks.
What is the cost of your Canadian home bias?
Canadian stocks in a rare moment
BMO’s Brian Belksi delivered an interesting stat via Scott Barlow in the Globe and Mail …
“The S&P/TSX gained 3.8% on a price return basis in March, outperforming the S&P 500 for the first time since September 2023. Interestingly this is the first time the TSX has outperformed the S&P 500 in a month of positive returns since April of last year. Indeed, from our perspective we are starting to see the early signs of a broadening out of performance, which we have consistently argued will be a key tailwind for Canadian equities in the second half of the year. While gold stocks and Energy were key drivers of performance, most sectors saw positive returns this month”
On earnings growth (the driver of returns) Belski went on to add –
“Canadian growth and growth expectations have clearly diverged from the US. The S&P 500 is set to post double-digit earnings growth this year, while the TSX is now expected to post only modest single-digit growth. Yes, while the slowing resource sectors growth is playing a major role in this divergence, our work shows the spread between the TSX and SPX earnings growth has reached an extreme. In fact, our blended EPS growth model for the TSX and SPX is at the widest spread since 2010″
The U.S. economy is still humming.
As many write, it appears that the U.S. economy is the last developed nation standing with respect to growth and innovation. They are dominating as they have for many decades. That’s no reason to go all in, but it stresses the importance of diversification. I have long declared my preference for U.S. over international, but sensible portfolio allocation would suggest an allocation to international markets as well.
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Many Canadian investors get that broader diversification by way of a global EX-Canada ETF such as XAW from iShares or VXC from Vanguard. It’s common to see –
Canadian stock portfolio + XAW
Those asset allocation ETFs know how to allocate
And of course you might get the most sensible allocation by way of one of the all-in-one global asset allocation ETFs.
As an example, iShares XGRO has an 80% stocks to 20% bonds target. On the equity front the fund shows (rounded) –
- 35% U.S.
- 20% Canadian
- 20% International Developed
- 5% Developing Markets
That is a balanced growth model that has delivered almost 10% annual over the last 5 years, and largely thanks to the performance of U.S. stocks.
You might chose to replicate the asset allocation models, or if you’ve had enough with portofolio management, you can buy the appropriate AA ETFs. They are fully managed portfolios, of course.
You’ll find some simple but effective asset allocation models on the Canadian ETF Portfolio page.
More Sunday Reads
At My Own Advisor, Marks looks at the pros and cons of investing (heavily) in Canada. Of course there are no pros. There is no reasonable reason to grossly overweight Canada, though most Canadian self directed investors would be guilty. I know better, and I am in the guilty camp for my personal portfolio. In my wife’s accounts I have been much more sensible with greater allocation to U.S. and International vs Canadian.
Most experts agree that a 30% Canadian allocation would be reasonable, even optimal. You might take that up to 40% without too much rotten fruit being tossed in your general direction. After all, we live here, and live with and by that Canadian currency.
And for the record I am recently underperforming on the Canadian equity front (thanks to a concentrated portfolio), but greatly outperforming on the U.S. side thanks to a concentrated portfolio. My allocation to Canadian oil and gas stocks has helped the cause north of the border, but has not picked up all of the slack. Bitcoin ETFs are also ‘helping out’.
Every week, we check in with Dividend Hawk. This past week, we shared some dividends from Telus and Pepsi (one of my favourite defensives). You’ll also find Hawk’s stock stories and stock posts of the week.
Portfolio withdrawal rates
At Banker on Wheels weekly (always a great journey) post, the safe withdrawal rates link caught my attention. It’s a long and data-heavy post but it offers some key observations. I will read it a few more times and will come back with some dedicated commentary. But one of the main takeaways was the benefit of gold and real assets for retirees. That has been a common theme on this blog and I’ve pointed to the Purpose Real Asset ETF (PRA) as a one-stop inflation and real asset option.
And more on the withdrawal rates and retirement strategies – should you plan your retirement strategy based on the 4% rule, or 70% of pre-retirement income. That’s from Findependence Hub.
Stocktrades Canadian picks
At stocktrades.ca Dan offers his favourite Canadian stocks for 2024. That’s a good list and a good post. Dan always has a total return focus. And that is what matters most over time.
Rob offers another portfolio update at Passive Canadian Income. Rob is also feeling that big Canadian dividend (lack of diversification) let down …
Still under performing as a lot of those interest sensitive stocks in the portfolio took a beating the last year. I feel like those stocks have kinda hit a floor while the market as a whole has some room to fall. The values today just seem a little frothy to me. Ahhh well, time will tell.
That said, I’m happy to see that Rob does track his performance, and he does have a beat over the TSX over the last several years. He might certainly stay the course and look for opportunties to expand the diversification.
Rob does have U.S. equities and XAW in the mix. His non-Canadian allocation levels will be a key consideration moving forward.
Tweet Week
I’ve long been critical of Canada’s EV strategy and taxpayer investments. More companies are bailing. None of the conditions are in place yet for mass EV adoption …
Consumers are choosing hybrid as a transtion vehicle.
And ya, the endless rate cut banter ‘just don’t matter’.
As always, get a portfolio plan and stick to it like glue. And that plan includes sensible asset allocation.
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I always find it interesting that so many bloggers are so closed minded about the way they invest and think that anyone that doesn’t invest in a similar manner is a fool. I must say that you are one of the more arrogant that I’ve seen.
Amazing that your can definitively say that there are no pros to being heavily invested in the Canadian market. My wife & I have been retired for 10.5 years without any company pension. We are 100% invested in TSX dividend stocks, No direct foreign exposure and no fixed income.
We now generate $203k of annual dividend income and have seen our annual dividend income grow every single year since retirement. We obviously will never need to sell any of our holdings to generate cash and will never have to worry about stock prices and total returns.
I would say that this approach might have a few pros and advantages,
Hey Dan, as you may know I am a big fan of Canadian stocks due to the core oligopolies that we can invest in.
It’s just that (historically) we can do better with MUCH less risk with ample U.S. exposure. And yes some other international makes sense as well. I believe that past will repeat. In 2024 that seems even more likely due to Canada’s no growth scenario.
Canada lacks diversification, plus an investor/retiree is putting their retirement in the hands of one currency. I think that’s a dangerous idea. It’s my duty to state that fact and share.
I’m just sharing the accepted truths on risk and asset allocation.
Who doesn’t want greater returns with much less risk?
But always, to each his or her own. 🙂
Home Trust – charges the exchange rate of the day. My experience is that the rate I was charged was never the high for the day compared to data from the Bank of Canada.
I see you deleted my post because I disagreed with you on there being no pros to being totally invested in the TSX. I didn’t realize you were part of the movement to ban free speech.
Anyway, pretty poor stuff and shame on you!!
Hi Dan, no I was just coming to reply to your post. I get a lot of spam emails and have to do a mass delete. I’ll see if I can find your comment, it may have been in the mix of deletes, but I do remember reading it.