Canadians love investing in Canada. Why? Because we’re familiar with these Canadian companies, we buy their products and we know where they operate. It just often seems safer to invest in companies that operate in our home turf. There’s even a name for this investing preference. It’s called “home country bias.”
But what many people don’t know is that investing too much of one’s portfolio in Canadian companies can actually increase your investment risk because of a lack of diversification. Even if you’re invested in many Canadian companies, your portfolio may still not be properly diversified.
Here are two very important reasons why you should be globally diversified:
For better sector diversity
About 70% of the Canadian market is consolidated in three sectors (financials, materials and energy), meaning it can’t offer you access to many of the sectors that are required for a truly diversified portfolio. For example, Canada doesn’t provide you with access to a large information technology or health care sector and, when these sectors outperform, a portfolio with only Canadian investments could miss out on much of those gains.
Conversely, when one of Canada’s three main sectors is relatively weak, a Canadian portfolio will feel that weakness a lot more than one that is fully diversified. In 2013, the price of gold was quite weak, which dragged down the materials sector and contributed to the Canadian market’s underperformance relative to global equity markets.
For access to the world’s fastest-growing markets
Although Canada has provided relatively strong gains over the years, Canada’s economy only accounts for about 3% of the global economy. As such, by focusing on Canadian investments alone, you miss out on benefiting from some of the great economic growth stories that are occurring in the U.S., China, emerging markets and many other parts of the world.
If you’re concerned about investing in regions that you are unfamiliar with, you can also consider investing in multinational companies that operate out of the U.S. These are strong companies that have a head office in a stable region of the world but generate much of their sales in fast-growing countries. This strategy allows you to invest closer to home, while accessing some amazing growth stories from around the world.