Most Canadians’ investment portfolios are highly concentrated in Canadian holdings, even though the TSX Composite comprises only about 3.4% of the MSCI World Market Index. This may be due to a phenomenon that we call “Home Bias”.

“Home bias” is the tendency to invest the majority of one’s portfolio in domestic equities, ignoring the benefits of geographic diversification. The main reasons for this common practice are familiarity and aversion to foreign currency risk.

Let’s take a look at how Canadian investments have performed in comparison to US investments. The attached chart shows that the TSX Composite has lagged the S&P 500 for almost the entire 11-year bull market, since 2009. The TSX is composed of roughly 31% Financials, 16% Energy, and 12% Materials; which means roughly 60% in Financials and Natural Resources combined. When these two sectors perform poorly, then it’s safe to say that the TSX Composite is unlikely to outperform its American counterpart. Contrary to the TSX Composite, the S&P500 is comprised of approximately 21% Information Technology, 14% Health Care, 13% Financials, 10% in Communication Services. These sectors happen to represent only tiny portions in the TSX Composite. Information Technology, for example, is about 5.6% of the TSX; and Health Care is about 1.5% of the TSX.

A large portion of the outperformance by the US index compared to the TSX has been due to the (average) outperformance of the technology sector, and the (average) underperformance of the resource sector. This is likely due to the fact that we are living in an era that is driven by technological innovation. There is less opportunity to excite investors with new products and innovations in the natural resources sector.  For example, Apple can continue to make new iPhone and iPad models to excite consumers and drive up the demand and price, but natural resource prices remain tied to fluctuations in supply and demand, as well as geopolitical factors. The prices of these commodities are mostly out of management’s control.

If you have not already diversified your portfolio to include foreign investments, consider doing so. If foreign currency is your concern, you might consider the currency-hedged versions of ETFs and/or mutual funds. These ETFs typically use forward exchange contracts to hedge against exchange rate fluctuations. They are an effective way to manage currency risks and allow you to include foreign investments in your portfolio, without the uncertainty of exchange rate fluctuations.