Key Reasons for Going Global
Quoted from an article on cbc.ca. The original post is here
...Fidelity Investments notes that historically in the past 15 years, Canadians would have maximized returns per unit of risk if they had allocated at least 40 per cent of their equity portfolios to international investments. In the period 1970 to 1990, the allocation should have been at least 50 per cent...
Among the key reasons for international investing cited from various sources are the following.
1. The Canadian stock market is only 4 per cent of total world stock market capitalization. Put another way, 96 per cent of equity opportunities are outside of Canada and 45 per cent are outside of Canada and the U.S.
2. The Canadian stock market is quite narrow, with more than 60 per cent concentrated in energy and financial stocks.
3. Because of the high proportion of energy and metals stocks, the Canadian market is more cyclical than many international markets. An extended slump in commodities prices would lead to a cruel underperformance for those relying on investing in Canada.
4. The top world companies in autos, household durables, food products, real estate, information technology, defence and pharmaceuticals are headquartered and traded on exchanges in the U.S., Europe and Asia.
5. International companies are in a better position to profit from lower wages abroad, such as in Latin America and Asia.
6. International stocks are generally cheaper, as measured by such metrics as price-earnings ratios, than Canadians stocks.
7. Profits will tend to accrue more to companies in high-growth countries such as China, which recently forecast a 10-per-cent real growth rate for 2007, compared with an expected 2-to-3 per cent real growth in North America.
8. Canadian and international stocks take turns producing top returns. Canada outperforms half of the time and international stocks the other half. Since Canada has outperformed for the last five years, there is a good chance it will start underperforming soon.
9. International stocks have a historically low correlation with Canadian stocks, meaning that, while there is no guarantee, diversification into international stocks should reduce volatility and risk in the portfolio – making for a smoother overall performance.
10. Foreign stocks often have higher dividend yields, which is a major component of total return over longer periods of time.
Some other advice from another post
4. Are you using a disciplined approach for selection of securities for your RRSP? The key is to let your winners run and to quickly get rid of your losers before they do too much damage to your portfolio.
7. Have you minimized expenses in your RRSP? It is another place where banks and brokers have their hands in your pocket, so make sure you are getting value for money. If you are invested in actively managed mutual funds with an annual management expense ratio (MER) in the 2.5-per-cent range, be sure your returns at least match the index, or else perhaps you should be in index-linked exchange-traded funds (ETFs) where MERs are generally less than 0.5 per cent.
6 comments:
great article, I only have 2 points to add though.
1) Currency risk - you have to consider the impact of relative value of the dollar of the foreign countries to canadian dollars. For example, if the CAD currency goes up for the year, the relative return for the investment will drop. There are ways to hedge against currency of course, and it needs a little more explanation.
2) Diversification - like the article said, international stock is great to diversify against your Canadian equities. However, you should also look at which regions diverisfy against US. Considering US is one of the biggest economy while Canadian is only 2%, you should look at how to minimize the impact of a possible slowdown of us market.
thanks lamb for the great points!
for 1) i remember what you said about using usd to invest in int'l market. how to leverage currency risk for cad then, considering it might go up?
2) i guess that means focus more heavily on asia ex-japan, latin america and europe then =p
1) that is right, I am glad you got the point! CAD will be short term weak if the energy/resource price stays low. But, in a longer term sense, invest Europe with CAD will help.
2) yap, you got that right, the order to avoid would be 1) Europe 2) Japan 3) ex-Japan Asia 4) Latin America.
whoops, i was meaning to say the order of perference for protecting yourself against us slowdown: 1) Europe 2) Japan 3) ex-Japan Asia 4) Latin America.
haha. you almost got me worried. but i thought japan disappointed most ppl last yr. does that mean it's still under value?
most analysts are saying the Japanese market was in a "pause" last year after 3 years of double digit returns, I tend to agree with these analysts. Unless you see a major slowdown in China, you will see japan to have a few more good years to come.
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