Add a foreign flavor to investments
There should be a clue for all of us in the fact that the federal government won’t allow us to hold more than 20 per cent of our RRSP or RRIF assets in foreign content.
Could it be that international investing is actually good for our financial health?
The answer is a resounding “yes.”
In recent months both the Investment Dealers Association of Canada, which speaks for this country’s brokers, and the Investment Funds Institute of Canada, which represents Canadian mutual fund companies, have lobbied Ottawa to increase allowable foreign content to 30 per cent.
Even the House of Commons finance committee recommends the limit be raised two percentage points a year for five years.
They all recognize that equity markets in Canada make up a fraction of the world’s total, and that, given time — which is what RRSPs and RRIFs are all about — Canadian investors would do a lot better with more of a foreign flavor in their holdings.
But Ottawa has said “no.” They don’t want to risk an additional outflow of capital at this time.
Unfortunately, this battle is falling on many deaf ears. The latest survey of the RRSP market, released by Scotiabank late last r, shows only nine per cent of the average RRSP is made up of foreign content. And a whopping 40 per cent of Canadian investors have no international investments at all in their RRSPs.
They’re missing out on a golden opportunity.
Far from being too risky, as many investors mistakenly fear, foreign investments offer potential for greater long-term growth and protection — both because the economies of other countries move in different cycles than ours, and because many are growing more dramatically than our domestic economy. It makes sense to participate in the extraordinary growth of some of the world’s economic “hot spots.” This strategy adds both geographic and currency features to a diversified asset mix, plus protection against any future declines in the value of the Canadian dollar.
And you don’t have to go out-of-country to buy foreign stocks or bonds. Nor do you need to become an expert. A wide range of excellent international mutual funds are sold by many companies operating in Canada. For the slightly more adventurous, there’s a legal way to increase foreign content beyond the 20 per cent limit: Buy Canadian funds that make maximum use of foreign content in their own portfolio — their foreign holdings don’t count towards your limit.
Don’t worry about international investing being too risky. I’ve seen every study done on the subject, and there’s only one conclusion: You actually reduce risk by investing at least some of your money outside Canada. In fact, it’s much riskier leaving all your money in any one country. That’s as bad as buying one stock instead of spreading an investment out over a number of good ones.
This may not sound patriotic, but you can’t afford patriotism when it comes to protecting your family and your financial future. Keeping all of your money in Canada just doesn’t make sense these days. From a global perspective, Canada represents only two or three per cent of the world’s markets, it has a small, resource-based economy, and a vulnerable currency. And furthermore, in the past 10 years, U.S. and international stock, bond and money market funds sold right here in this country have dramatically outperformed the average Canadian fund. There’s far too much potential profit at stake to ignore this part of your portfolio.