Financial Focus: The benefits of going global

By Medicine Hat News on March 3, 2018.

The U.S. market was one of the best performing markets last year, and Canadian stocks lagged on a global basis. Global diversification is one of the “golden rules” when it comes to investing. With Canadian investors’ bias towards Canadian stocks, many investors that did not have exposure outside of Canada missed a significant year of growth in the equity markets.

The global economy is grouped into 11 economic sectors. Those sectors are financials, industrials, energy, consumer staples, consumer discretionary, materials, technology, health care, telecommunications, utilities and real estate. Canada’s stock market is concentrated in just a few economic sectors — primarily, the financial, materials and energy sectors. Just as you can diversify by geographic area, you can also diversify by industry sector to reduce risk. Therefore, when you forgo global stocks in your portfolio, you not only forgo the risk-reduction benefits offered by global diversification — you also forgo the risk-reduction benefits offered by sector diversification.

Buy investing in companies that have operations all over the globe you increase your chance of riding out economic downturns in one geographical area. If a company is only doing business in Canada and we enter into a recession then it will affect that Canadian focused company substantially. If on the other hand you invest in a company that has operations all over the globe, a recession in Europe will affect European operations and not necessarily other parts of their global operations or overall profits. Companies that are only Canadian based, and do business only in Canada, can only sell to a small population compared to the population of the planet.

Up until 2005, the foreign content rule limited RSP accounts to invest only 30 per cent in global investments. With the elimination of the rule, you now have more flexibility in choosing the investments that can best help you achieve your retirement goals. The Canada Pension Plan has changed its investment approach as well. In 2006 it held about 33 per cent of its assets in Canadian Equities compared to now where the CPP has just over 8 per cent in Canadian Equities, both public and private.

Canada only represents 3 per cent of the investment opportunities available worldwide. That means the vast majority of investment opportunities are beyond Canada’s borders, in places like the U.S., Europe and Asia. In addition, with Canadian markets strongly weighted in just a few sectors, you may not necessarily be able to find quality companies in certain sectors, if you want to diversify by sector to reduce risk. By going global, you can choose from a larger pool of quality investments in a wider range of sectors.

Several international markets have historically performed better than Canada over the longer term. By taking advantage of the growth potential offered by global markets, you can enhance your portfolio’s return potential. Increasing your portfolio’s return by even one or two percentage points can have a dramatic impact on your post-retirement income.

A. Craig Elder, CFP, FCSI, CLU, CHS is branch manager with RBC Wealth Management Dominion Securities Inc. in Medicine Hat. Advisors are insurance licensed under RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities and is part of the RBC Financial Group, member CIPF. For more information on this and other financial strategies contact an advisor 403-504-2700.

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