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Foreign RRSP investments often overlooked

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(Special) - Think foreign.

For years, RRSP holders were only allowed to have a small percentage of their investments in foreign assets.

Initially when they were started in 1957, only 10 per cent of revenue in an RRSP could be derived from foreign sources. That was raised to 20 per cent in 1994 and hiked again to 30 per cent in 2001 until the restriction on foreign investments was eliminated in 2005.

"I guess the governments in those days were concerned about the perception of risk that surrounded foreign investments," says Bob Jamieson, a financial adviser with Edward Jones. "After all, RRSPs were designed to help people save for their retirement and the government didn't want people taking on too much risk in their retirement portfolios."

There are a number of reasons why investors should look at foreign markets and assets for their RRSPs.

For one thing, Canada represents only four per cent of the world's equity market, so by restricting yourself only to Canadian investments you are effectively cutting yourself off from 96 per cent of the world's investing opportunities.

As well, the Canadian economy is very heavily influenced by the U.S and other world economies. When they do well our economy and markets tend to perform well. But when they struggle, so does we.

"For many years we did well but the slowdown in the world economy has had an effect," Jamieson says. "Over the last three years the U.S. markets have outperformed Canada by more than 40 per cent, so if you limit yourself just to Canada you are really limiting your options."

Removal of the 30 per cent foreign content limit means you could actually have 100 per cent of your portfolio outside the country. That level probably is excessive for most people and Jamieson recommends investors consider holding between 25 and 40 per cent of their RRSPs outside of Canada in the U.S. and overseas.

You can gain access to foreign markets in a number of ways, including mutual funds which invest in many geographic areas, exchange traded funds which track foreign market indices, Canadian bonds denominated in a foreign currency or mutual funds owning foreign currency bonds, and through Canadian companies with foreign interests or mutual funds that hold businesses with foreign interests.

Global investing does have one risk that Canadian investments generally don't - currency risk. "The Canadian dollar has gone from 60 cents to over par with the U.S. dollar since the 1960s," Jamieson says. "Currency fluctuations and risk are definitely factors to be considered, but they can be hedged through mutual funds and ETFs."

Jamieson advises investors to look for long-term opportunities in the foreign marketplace and consider ETFs and mutual funds which will have diversified investments in foreign countries, markets, indices and companies.

Jamieson and other financial professionals seem to concur about a general bias that investors have to invest in securities in their own country. That's not too bad if you live in the U.S. because the markets there are much larger and more diverse than markets in most other areas of the world. But if you live elsewhere it can limit your options.

So take a look at your portfolio to find out how much is invested globally and domestically and make sure you have some exposure to global markets. It's also a good idea to consult a financial adviser who knows and understands foreign markets to be sure you are getting proper investments, exposure and diversification that suits your goals and risk tolerance.

"It's interesting to note that some of the largest and most sophisticated pension plans in the world like the Canada Pension Plan and the Ontario Teachers' Pension Plan have more than 75 per cent of their investments outside of Canada, which is a real indication of how important it is for people to think about when they do their RRSP investing," Jamieson says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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