According to Statistics Canada, we took millions of trips beyond our borders over the 12-month period ending August 2023, with our voyages rising 32% to almost five million, the vast majority of which were to our closest neighbour the United States.1 And while recent data shows our interest in purchasing non-Canadian assets, especially U.S. ones, rose significantly – to just under $15 billion in the latest month available2 – we still seem to prefer to concentrate our assets on homegrown choices:
Source: Investor Economics Household Balance Sheet Report 2022, data as of December 2021.
While our home markets provide many excellent investments, the world is a big place full of opportunities to diversify our portfolios, enhance portfolio risk control, and invest in some of the greatest companies in the world. Here are three reasons to get out there and embrace a world of opportunities:
1. A small salmon in a big pond
Looking more closely at our investment portfolios, Canadians may not realize how concentrated they are in domestic holdings. Industry figures put the Canadian content of the average portfolio at approximately two-thirds, with the rest invested heavily in U.S. securities3. But on just the equity side of the equation, Canada accounts for less than 3% of total global investment market capitalization4, meaning domestic investors who are crazy about their homegrown equities may be missing out on more than 97% of available equity investment opportunities. And many of these foreign investment opportunities provide wide-ranging diversification opportunities in leading global companies, such as Microsoft, Apple, Amazon, Nestle, Walt Disney, Unilever, Alphabet, Volkswagen, Toyota, Home Depot, and so many more.
2. Go forth and diversify
From a diversification perspective, Canada’s benchmark S&P/TSX Composite Index is heavily weighted in just three sectors, with Financials (30%), Energy (18%) and Materials (12%) accounting for approximately 60% of the entire index. This greatly reduces sector diversification opportunities relative to indexes like the U.S.-based S&P 500, including in such innovative and high-growth areas as Health Care and Technology. For Canadians, allocating a portion of their equity investments outside of their home country can help bring better sector diversification in their personal portfolio. For example, Health Care stocks make up only 0.3% of the Canadian equity market, but are a much larger part of the global stock market at almost 13%.
Source: RBC GAM, as of August 31, 2023.
Within that context, it’s not hard to see how much opportunity there is to diversify our wealth across the world. Beyond missing out on a wealth of opportunities for investment beyond our borders, geographic diversification can enhance returns while actually reducing risk. So, when one region is underperforming, another could be overperforming, and this has been shown to smooth out returns over time. And this diversification helps investors achieve more stable returns over time, while reducing their volatility of their portfolios.
3. The world is at your fingertips
Fortunately, Canadian investors today have no restrictions on foreign investment ownership in their accounts, like they once did in their Registered Retirement Savings Plans (RRSPs). As well, the ease at which an investor can achieve foreign exposure to equities, fixed income or even a globally diversified portfolio is easier – and more cost-effective – than ever.
Given the enhanced investment opportunities and helping to potentially enhance returns while reducing risk, not travelling outside of and exploring the world beyond our borders seems like a real pity, eh?
Talk to us to learn more.
Sources:
1 –Travel between Canada and other countries, August 2023 Statistics Canada.
2 – Canada's international transactions in securities, August 2023. Statistics Canada.
3 – Ipsos Reid survey of Canadians, conducted July & August, 2015.
4 - Distribution of countries with largest stock markets worldwide as of January 2023, by share of total world equity market value. Statista (January 2023).
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