Investing globally can increase the return potential of your portfolio while lowering volatility and enhancing diversification.

 

What is global diversification and why it makes sense

 

Many investors already diversify their portfolios by holding securities across different asset classes and sectors, but it’s important to diversify globally as well. Adding global exposure to your portfolio, meaning investing in financial markets outside of Canada, may increase returns and reduce volatility. Increasing global exposure can also reduce country-specific risk and allow portfolios to harness the economic growth and innovation that’s occurring outside our borders.

 

Canadian investors stay close to home

 

Canadians tend to hold the majority of their assets within their own domestic market (an investing tendency referred to as home country bias). With the average Canadian allocating only approximately 10% of their assets outside of Canada, their investments are primarily focused in a Canadian stock market that represents less than 4% of the global market capitalization.

 

The average Canadian has 90% of their assets tied to Canada

 

46.8% Real estate

12.6% Funds, stocks and bonds (Domestic)

8.4% Funds, stocks and bonds (Foreign)

15.9% Pensions, insurance, CPP/QPP

10.5% Cash and GICs

5.8% Private mortgages and businesses

Source: Investor Economics Household Balance Sheet Report 2017, data as of December 2016.

 

Global exposure can reduce volatility

 

Canada is heavily reliant on two cyclical sectors – energy and resources – which tend to experience higher levels of volatility on a year-to-year basis, particularly relative to countries like the U.S. This volatility can be reduced by supplementing Canadian exposure with global exposure, as the two portions of the portfolio may respond differently to the ever-changing macro-economic environment, including the market’s relationship with interest, exchange, and inflation rates.

 

How to achieve global diversification

 

Investors should review their asset mix to ensure they’re effectively positioned to benefit from growth opportunities around the globe, instead of relying solely on the strength of Canada’s economy and commodity markets to reach their investment goals.

 

Adding diversification through increased exposure to global market opportunities and reducing “single country risk” should be a consideration for every investor, regardless of risk profile.