In today’s financial marketplace investors should be considering global diversification for their investment portfolio.
It is true that investing internationally involves political and economic risks, as well as the risk of currency fluctuations. However, international trends towards deregulation, privatization of government monopolies, global expansion and technological innovation are all reasons to direct at least a portion of your investments into international markets.
This year to date, Canada has been one of the top-performing equity markets. However, the Toronto Stock Exchange (TSE) 300 rarely is a world leader when measured by performance. Over the 20-year period from Aug. 1, 1980, to July 31, 2000, the Morgan Stanley Capital International (MSCI) World Index achieved an impressive 16.6 per cent compared to 11.4 per cent for the TSE 300.
Though Canada holds an enviable position within the world, there is no escaping the fact that our financial markets comprise a mere 2.5% of the world capitalization. It follows, then, that the majority of investment opportunities fall outside of our domestic borders. In addition, if the Canadian economy experiences a slump, foreign markets that are growing more rapidly can offset a downturn in our economy.
Although I have an optimistic outlook for the Canadian market, the fact remains that investing solely in Canada has, and will likely continue to have, the effect of both reducing returns and increasing the variability or risk level of a portfolio.
Most professional money managers would claim that at least 30 per cent of your assets should be invested in foreign markets. At ScotiaMcLeod, we analysed the historic performance of various world markets and found that investors would have been able to enhance returns and/or reduce volatility by holding up to 75 per cent of their portfolio in foreign markets.
In a separate study, the risk and return trade-off was examined for various combinations of Canadian and world equities as represented by the TSE 300 and the MSCI World Index respectively.
It was determined that a hypothetical portfolio of 50 per cent foreign stock and 50 per cent Canadian stocks provided less risk and higher returns than a portfolio of 100 per cent Canadian stocks.
The Canadian government restricts international investments to 25 per cent of an individual’s registered retirement savings plan (RRSP).
Recently, a new generation of 100 per cent RRSP-eligible foreign funds were introduced to the market. These new funds offer a compelling combination of foreign exposure, full active management and 100 per cent RRSP eligibility. Most of the major fund companies now offer these new funds and they are worth considering for your RSP.
This is not meant to be an argument for abandoning Canada. There are numerous companies of strong merit which are publicly listed in this country, many of them world class in their industries.
However, while there is no magic number that would suit everyone, one thing is clear — gaining global exposure beyond the 25-per-cent limit can help increase potential returns and in many cases, lower risk. To learn more about how investing internationally can benefit your investment portfolio, contact your financial adviser today.
(Derek Ballendine is an investment executive with ScotiaMcLeod Inc. These views and ideas belong to Derek Ballendine and do not necessarily reflect the views and and ideas of ScotiaMcLeod.)
