I’ve always loved to travel. Whether it be for work, school or pleasure, travel to new and unfamiliar destinations has been one of the few constants in my life over the past 10 years. I have now been to over 60 countries, and I truly believe that my travels have provided me with an auxiliary education I never could have received from books or traditional schooling. I think Aldous Huxley was right when he said, “To travel is to discover that everyone is wrong about other countries.” I also think that it has gifted me with an important global perspective.
Spending time in Myanmar or South Africa makes you realize that there is ‘a whole world of people’ beyond both our own borders, and beyond the Western bubble that so many of us rarely leave. As a Canadian, I just have to think about China to bring things into perspective. According to the 2016 census, the City of Toronto has a population of 2.73 million people. A quick Google search reveals that China has over 40 different cities, that each have a greater population than Toronto. I would assume the average Canadian or American could not name more than five of these 40 cities.
A global perspective can also help us realize just how imbalanced most Canadians’ investment portfolios are. According to a 2017 study by Vanguard, the average Canadian investor has 59% of their equity portfolio invested in Canadian stocks. Compare this to Canada’s current share of global capital markets, which hovers around 3%. This means that the average Canadian has overweighted Canada by 56 percentage points compared to its relative importance to global stock markets! This phenomenon is referred to as ‘home country bias’ and, according to the study, Canadians are more susceptible to it than anyone other than Australians. Perhaps it’s due to the massive geographic scale of Canada — a place where you can drive 76 hours consecutively without needing a passport (Toronto to Inuvik) — but for some reason Canadians love to invest in our own companies.
This bias is particularly dangerous for Canadians because the TSX is heavily concentrated in sectors such as financial services (32%) and resources (29%), and has poor representation in sectors like consumer products, health care and information technology.
Now there are several legitimate arguments for overweighting Canada as a Canadian investor. The one you hear most often is liability matching. Since a Canadian’s liabilities (e.g. future spending) will be in Canadian dollars, their assets should match up against their liabilities from a currency perspective. As a Canadian, when I invest in the Royal Bank of Canada, I don’t need to worry about currency movements the way that I do when I invest in Amazon or HSBC. I buy this argument to a certain extent, but it doesn’t justify having over half of an investment portfolio invested in Canadian stocks. This sort of overconcentration in Canada can result in a risky and undiversified portfolio. Over the last 10 years, it would have also resulted in a lot less money.
The table below illustrates the annualized returns of several different stock market indices in Canadian dollars this decade (2010-2018). As you can see, the Canadian market has not just lagged the soaring US stock market, but has also underperformed the MSCI EAFE (Europe, Asia, Far East) Index, and the MSCI Emerging Markets index. The second row illustrates the dollar impact in an investment portfolio. If an investor started with $100,000 in 2010, nine years investing solely in the US market would have generated more than twice as much money as investing solely in the Canadian market. True, this has been a spectacular decade for U.S. securities, driven in part by the outsized gains in technology, and other decades will show reversals, but it certainly argues for not having all your eggs in one (Canadian) basket, especially given the narrow offering available.
|TSX||S&P 500||MSCI EAFE||MSCI Emerging Markets|
|Annualized Returns (2010-2018)||4.7%||13.4%||6.6%||5.0%|
|Value of $100K invested in Jan. 2010 at Dec. 2018||$151,596||$310,473||$177.752||$154,737|
The returns in the above table are expressed in Canadian dollar terms. In other words, as a Canadian investor investing in these foreign indices, these are the returns you would have earned in Canadian dollars over this time period. These returns were generated in a decade when one Canadian dollar has been worth anywhere from a low of $0.69 US to a high of $1.06 US (Oh to be a Canadian abroad in the glory days of 2011 again). The point is that currency markets will fluctuate, sometimes significantly, but this does not justify tilting your investment portfolio so heavily towards domestic equities.
I am not suggesting that all Canadians should rebalance their equity portfolios to hold only 3% of their investments in Canada. This is not realistic or practical for the large majority of Canadians. With that said, I do think there are geographic allocations that make more sense than investing 59% of your portfolio in the world’s 38th largest country by population. Northwood Family Office clients will often have 33% in Canada, 33% in the US, and 33% everywhere else. There is no one right answer to this question, but 60% or more of your life savings invested in Canada is probably the wrong one.
In the Vanguard study, one of the reasons cited for home country bias (beyond the previously mentioned liability matching) is a preference for the familiar. This suggests that investors generally feel most comfortable with their home market and allocate their investments accordingly. This phenomenon goes beyond investing. As humans, we innately crave the familiar, because from an evolutionary perspective, familiar things feel safer than less-familiar things. To put it simply, if we have survived exposure to something in the past, a part of our less evolved lizard brain steers us towards this familiar experience again. This phenomenon can help explain everything from why Canadians have such unbalanced investment portfolios, to why some Canadians will choose to return to the same resort in the Caribbean year after year!
Personally, I think that Canadians need a more global perspective in their portfolios and their passports. Too many people choose to travel to places they’ve already been, or places that everyone else has already been, or to places where they know exactly what it’s going to be like before they ever leave home.
Maybe this is the year to take a risk, and strive to develop a global perspective in all aspects of your life. Tilt your portfolio towards international equities (as needed), and maybe think twice about heading back to that same vacation spot you’ve already been to several times.