Is it too late to diversify investments outside Canada?

Hey there, time traveller!
This article was published 10/05/2013 (4627 days ago), so information in it may no longer be current.

Last week, we talked about offshore bank and investment accounts, how some people attempt to use these to hide income from Canada Revenue, and how this practice is illegal.

Today, we will look at something completely different — diversifying investments outside Canada. For most people, this is done through their investment accounts with Canadian institutions, and that’s what we’ll talk about here.

Canada has become a very popular place in which to invest over the last 10 or so years, because from roughly 2000 to 2010, our stock market outperformed most of the other major stock markets.

Canada has become a very popular place to invest over the last 10 or so years, because from roughly 2000 to 2010, our stock market outperformed most of the other major stock market

The bulk of our stock market — financial stocks — fell less than most other countries in 2008 and recovered more quickly. As well, the first decade of this millennium saw huge growth in demand by developing countries for Canada’s resources, and a resulting surge in resource prices, albeit with several significant interruptions.

At the same time, our dollar increased in value from a low of 62 cents US to near parity today. (This ignores the temporary surge to $1.06 in 2007 and the subsequent plunge in the financial crisis.)

The relative decline of the US dollar and other major currencies vis–vis the loonie helped to make foreign-investment returns look even worse than they were.

So, looking back to say, 2010, it was clear to “everybody” Canada was a much better place to invest than anywhere else. At the same time, of course, everyone could see the U.S. was a basket case financially and politically, with soaring deficits and no ability to make decisions. Europe’s problems were even more obvious.

So, what happened in 2011 and 2012, and so far in 2013?

Naturally, the stock markets in those “basket case” countries outperformed ours.

Lessons? When everybody knows something, that knowledge is usually built into stock prices, and exceptional returns never come from following the herd.

Let’s look a bit more analytically at the investment opportunities available to you. Canada makes up less than four per cent of the world’s stock markets by value. That means there are thousands of great companies that don’t trade on Canadian exchanges.

More concerning, almost two-thirds of our market is made up of either financial or resource and materials-related companies. We have a real shortage now of large consumer staples, technology, professional services, manufacturing and pharmaceutical companies.

The big six Canadian banks have been a huge engine of market growth, as they received a huge benefit from technology, demographic and interest-rate trends. No one expects the same growth rate in the next decade as over the last two.

Resources depend on demand from the developing countries, led by China and India. However, their economic growth rates appear to be moderating back from the previously stratospheric levels.

Arguing in favour of Canadian equity investments are the attractive tax treatment of dividends paid by Canadian companies and the elimination of currency risk. (On the other hand, snowbirds who spend winters outside Canada should hold reserves of the appropriate foreign currencies.)

I am not arguing in favour of dumping all your Canadian investments, and running offshore. However, I am suggesting nothing lasts forever, such as Canada’s 10-year outperformance. Traditionally (prior to the year 2000), the best risk/reward ratio in investing was achieved with roughly half of a portfolio’s equities in Canada, and half outside.

In spite of the very recent outperformance by foreign markets, it may still be time to open one’s mind to the wealth of opportunities outside our borders again.

Just a thought…

David Christianson is a financial planner, advisor and Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.