I was speaking to some American financial advisors once and we started talking about geographic diversification. I mentioned that it wasn’t uncommon for Canadians to have extreme home biases, and many Canadians only invest in Canadian stocks. They said the same thing for American investors.
Considering that the US has traditionally been 50% of the world’s stock market (by size) it’s less of a stretch for Americans than it is for Canadians (Canada has traditionally been about 2 to 4% of the world’s stock markets by size). Some of the American financial advisors fell of their chairs during our discussion since it would be akin to an American investor putting their entire portfolio into handful of US mid-cap, industrial stocks (for example).
On the world stage, Canada is more akin to a small-cap and mid-cap market (there are only a few large cap companies on the global stage’s standards), and we all know our market is dominated by energy, financials and materials (they account for the vast majority of all companies by size in Canada – leaving out 7 other major sectors).
So why do we have such a home bias?
Partly because there is a slight tax advantage to holding Canadian stocks, but mostly its psychological. You tend to feel more comfortable investing in companies whose names you know and whose signs you see all the time. As reader Connie also points out, currency fluctuations between your home currency and foreign investments denominated in other currencies adds another variable to the mix (which can help or hurt).
Advisors and investors bring biases to their portfolios all the time. For example, I can tell you that investors and advisors who have immigrated from the Far East have 2x to 3x the allocations to emerging markets than born and raised Canadians. This is just from experience, I don’t have any stats to back that up empirically, but it’s true. :)
So what are the right allocations? Well, that would take a long time and is best saved for some future posts. There is no perfect allocation, but you do have to understand what risks you are exposed to with the allocations you take – and my point is that people, generally, don’t.
My home bias is directly linked to one thing. I have no idea how the currency is going to move. I have been invested for a full year in a upwardly mobile stock and the Canadian dollar was dropping at the same time (or something like that) and my value dropped. I cannot anticipate 2 things at the same time. The right type of stocks and how the currency market is going to perform.
Stocks are complicated enough.
Home bias is normal, around the globe. We understand the business dynamics of our own countries far better than foreign countries, together with our understandings of accounting, regulation, exchange controls, information disclosure, legal systems, economic policy, etc.
Excellent point Connie.
I invest in the TSX mostly, even investing in the US you can get derailed by the currency exchange, imagine you bought U.S stock 2 years ago that plummeted by 40% and then you lost another $.15 on every dollar..
Ive done well investing in the TSX and have no plans to change, for the reasons mentioned, you dont know the companies over seas, taxes and currency issues..no thanks
One more thing, the size of the market compared to the world is irrelavent, there are thoousands of Canadian companies on the TSX
Don’t be so quick to say you’ve “lost” money on e.g. US investments. You’ve only lost in as far as you would eventually spend that money in Canadian $.
I’d wager that if most Canadians added up what part of the eventual use of their retirement savings will be tied to the US dollar, it would be more than their investment exposure.
Do you want to spend your retirement in Florida? Or travel internationally? Will you buy a car? An electronics gadget? All of these things are not really constant price in Canadian dollars. They are much more denominated in USD.
To take an extreme example. You invest CA$1000 = approx US$950 in US stocks that over 10 years double in value to US$1900. You use the money to buy a nice US$1900 gadget. Which would you prefer: a) CAD/USD has stayed constant, you’ve made CA$950 in taxable capital gains. Or CAD has dropped 50% of its value so your investment is worth US$1900=CA$1000 (still) and no taxable gain? In each case, you have your gadget (payoff) – but in one case, you owe RevCan in the other you don’t.
One of the first rules of investing I guess is invest in what you know. However, that doesn’t mean that you should go out and educate yourselves so that you know more :)
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Interesting… that’s in part why I decided to begin a website with a stronger canadian focus, without ignoring the major market down south. Canadians are looking for some good Canadian investments and advice.
I think the tax advantages, particularly with non-registered accounts, in investing directly in Canadian equities is a bit more than a slight advantage, especially if one is counting on dividend income for their investment strategy.
Personally, my goal is to eventually increase the % of foreign content in my portfolio as time goes by. I think the U.S. offers a host of great companies that allows Canadians to diversity into otherwise non-available sectors. For example, stocks such as KO, JNJ, PG, WMT, MMM, K, etc. all offer Canadians solid capital appreciation and dividend growth over time, in my view.
Nice thread!
If you look at Canada as part of your foreign content over the past ten years, it is by far the best. Even better then Brazil, so it has worked out well for us!!!
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