Are Your Investments Traveling the Globe?
When it comes to managing investments, diversification is key. Diversification can be achieved through a single investment fund - such as a balanced or target date fund – or through portfolio construction.
Within asset classes, it’s important to diversify equities geographically. Exposure to equities in different economies, such as Canada, the US, Europe, Asia and emerging markets can help to reduce risk and maximize returns. Equity exposure can be achieved through a single balanced or target date fund, or through building a mix of Canadian and non-Canadian investments.
Most Canadian investors have traditionally invested primarily in Canadian stocks, which is known as “home bias”. However, this tendency can create additional risk as the Canadian stock market only represents less than five per cent of global stocks and is heavily concentrated on just three sectors: financials, energy and materials. With exposure only to Canadian stocks, it is possible for investors to miss out on the rest of the world’s investment potential and if the Canadian market becomes weak, there isn’t the opportunity for offset by stronger potential growth from other economies.
When reviewing your exposure to non-Canadian investments, your first step in geographically diversifying your equities is to review your current, non-Canadian investments. If your investments are in a balanced or target date fund, your investment manager will take care of ensuring the investments are diversified with the fund’s guidelines. If you construct and manage your own portfolio, you may want to consider adding exposure outside of Canada. Depending on your available fund options, you may be able to add U.S equity, International Equity or Global Equity.
International equity refers to Europe, Asia and the Far East (it does not include Canada or the US).
Global equity includes investments anywhere in the world, including North America.
Keep in mind that when investing outside of Canada, the value of your investments will be impacted by the fluctuating exchange rate. This additional currency risk can either be positive or negative.
Not every investment is right for every investor and you should only invest according to your individual risk tolerance and circumstances. If you have any questions, it is recommended that you contact a qualified investment or financial planning professional.