Gen Y investors missing out due to ‘home bias’

We like to think of Generation Y – also known as Millennials – as a worldly bunch, but a new survey from Scotiabank paints a different picture when it comes to investing.

It finds Canadians between the ages of 18 and 34 are less likely than their elders to have foreign investments in their portfolio. Only 16 per cent say they invest outside Canada compared with 28 per cent of Canadians at large.

It’s a bit shocking that Canadians of every age invest so heavily at home considering Canadian equities account for less than three per cent of all publically listed companies in the world.

The phenomenon is called 'home bias' and it applies to just about any country where investors have an irrational comfort level at home and a fear of the outside world. Its roots in Canada go to back to the days when the Federal government restricted registered retirement savings plans (RRSP) from holding more than 30 per cent in foreign securities.

Foreign content restrictions were lifted from RRSPs less than a decade ago and have never applied to tax free savings accounts, but we still can’t seem to cut the cord.

Why 'home bias' is risky

Home bias exposes the investor to the risk of a single country and denies growth opportunities in other parts of the world.

As an example, after years of outperforming global markets Canadian equities gained in value by less than 4 per cent in 2012. During the year U.S. equities in the S&P 500 and international equities in the MSCI EAFE grew by over 13 per cent. The bulk of that growth comes from emerging markets in Asia and South America.

Home bias is good to a point because it reduces the risk of currency fluctuations eating into your savings and it is good to invest in companies that you know and understand.

In addition, Canadians can get the best of both worlds by investing in the domestic resource sector, which can benefit from global demand for resources like oil and lumber.

For those reasons the percentage of Canadian investments in a portfolio should be much higher than 3 per cent. It’s best to talk to a financial advisor about what that portion should be in your portfolio – but here are a few good ways to own a piece of the world:

* Global equity funds can go anywhere in the world to find the best companies in the best countries. The average global equity fund returned 11.4 per cent last year.

* U.S. investors do not need to worry about home bias because the largest economy in the world is diversified and many U.S.-listed companies are multinationals. Canadians would be wise to tap into that diversification through a U.S. equity fund, which returned 10.4 per cent on average in 2012.

* A great way to compliment a U.S. equity fund in your portfolio is through an international equity fund, which invests outside of Canada and the U.S. Last year the average international equity fund returned 15.5 per cent.

* Management fees can get pretty hefty on mutual funds so investors who want to buy into global growth can bypass a manger through a less expensive exchange traded fund. There are ETFs that track just about every index in the world and more – and there are several ETFs offered for each major index.

* One innovative way to invest in areas of the world with growth potential – and avoid direct risk - is through the growing number of companies that invest in those areas. U.S-listed multinational companies such as General Electric, and Johnson & Johnson now generate most of their revenue outside the United States.