Investing globally can increase the return potential of your portfolio while lowering volatility and enhancing diversification.
Many investors already diversify their portfolios by holding securities across different asset classes and sectors, but it’s important to diversify globally as well. Adding global exposure to your portfolio, meaning investing in financial markets outside of Canada, may increase returns and reduce volatility. Increasing global exposure can also reduce country-specific risk and allow portfolios to harness the economic growth and innovation that’s occurring outside our borders.
Canadians tend to hold the majority of their assets within their own domestic market (an investing tendency referred to as home country bias). With the average Canadian allocating only approximately 10% of their assets outside of Canada, their investments are primarily focused in a Canadian stock market that represents less than 4% of the global market capitalization.
The average Canadian has 92% of their assets tied to Canada
|14.7%||Funds, stocks and bonds (Domestic)|
|21.9%||7.2%||Funds, stocks and bonds (Foreign)|
|14.4%||Pensions, insurance, CPP/QPP|
|11.9%||Cash and GICs|
|5.1%||Private mortgages and businesses|
Source: Investor Economics Household Balance Sheet Report 2021, data as of December 2020
Investing globally can improve sector diversification as a portfolio gains exposure to industries under-represented in Canada. Our market is dominated by the Resources and Financials sectors. Health Care, Information Technology, Industrials and Consumer Discretionary (and the opportunities that come with them) only make up 20% of Canada’s stock market.
If you are not investing outside of Canada, you may be missing out on opportunities arising from global healthcare innovations and ground-breaking research.
2018 R&D spending by industry
Almost 80% of spending occurred in industries that make up less than 20% of Canada’s market
Source: Bloomberg data, Capital IQ data, 2018 Global Innovation 1000 Study. Total R&D spending = US$781.8 billion.
Canada is heavily reliant on two cyclical sectors – energy and resources – which tend to experience higher levels of volatility on a year-to-year basis, particularly relative to countries like the U.S. This volatility can be reduced by supplementing Canadian exposure with global exposure, as the two portions of the portfolio may respond differently to the ever-changing macro-economic environment, including the market’s relationship with interest, exchange, and inflation rates.
Investors should review their asset mix to ensure they’re effectively positioned to benefit from growth opportunities around the globe, instead of relying solely on the strength of Canada’s economy and commodity markets to reach their investment goals.
Adding diversification through increased exposure to global market opportunities and reducing “single country risk” should be a consideration for every investor, regardless of risk profile.