How to avoid the loonie blues

It really is a lousy time to be a Canadian investor. Despite our country’s relative economic and fiscal strength, the loonie is being battered again, and this at a time when the fundamentals would seem to be working in its favour.

As for our stock markets, they’re woeful. The TSE 300 has the questionable distinction of being one of the world’s worst performers so far in 2001. As of March 2, it was off 10.4 per cent.

The only major markets to have done worse (if we can call ourselves a major market) are:

  • NASDAQ Composite (down 14.3 per cent)
  • Tokyo’s Nikkei Index (down 11 per cent)
  • Paris CAC-40 Index (down 10.7 per cent).

The only indexes that are performing well so far this year are in Latin American, where: 

  • Brazil’s Bovespa Index is up 8.7 per cent
  • Mexico’s Bolsa is ahead 8.5 per cent.
When these countries are topping the list, you know times are tough.

Nortel’s impact
Of course, if you take Nortel Networks out of the equation, the Canadian situation doesn’t look quite as gloomy, as I have pointed out before. The TSE 60 Capped Index is down only 4.5 per ct (to March 2) compared to -11.6 per cent for the uncapped version of this blue-chip index.

However, the slide in Nortel’s share value now means that there is little difference between the capped and the uncapped versions. (The capped version doesn’t allow one stock to have a weighting of more than 10 per cent). So that dichotomy is not going to continue.

All this reinforces an investing principle I have stressed repeatedly:

  • Diversify your portfolio internationally.

Last year, when Canadian markets were riding high on the strength of the Nortel boom, many people lost sight of this. That was perhaps understandable, with the Canadian market the strongest in the world at that time with a year-over-year gain of more than 60 per cent at one stage during the summer. But it all melted away faster than snow in the spring and we’re back to our more traditional role of also-ran.

Take action
It’s true that international diversification wouldn’t have given a big boost to your equity portfolio so far this year. But it probably would have reduced your losses, especially if you’re an index investor. The Dow, the S&P 500, and most European markets have all done better than the uncapped TSE so far this year. Also, your losses would have been further reduced if you’d held U.S. based assets because of the slippage of the loonie.

Often we know that good investment principles suggest a specific course of action, but we fail to act on it. This is that kind of situation. Many people with only limited foreign content in their portfolios will read this and think: ‘I must do something about that.’ But they’ll never get around to it.

Don’t be one of them. Review your assets and, if appropriate, take action now.

Adapted from the Internet Wealth Builder, a weekly investment e-mail newsletter edited and published by Gordon Pape.