Investing globally: Canadians missing out on world of opportunity

Of all the publicly traded stocks in the world, Canadian equities account for fewer than 3 per cent. Yet Canadian retail investors continue to overload their portfolios with the old Canadian standards.

It's called "home bias" and it has become ingrained in the Canadian psyche, partly because less than a decade ago the federal government restricted the number of foreign holdings in a registered retirement savings plan to 30 per cent.

That restriction has been lifted but home bias is still prevalent in many investment portfolios and even the typical investment advisor portfolio model.

By not holding foreign investments you deny yourself access to 97 per cent of the world's public investment opportunities and expose your savings to the risk of a single country - Canada.

Adding to the risk is the fact that roughly 30 per cent of all Canadian equities are directly resource related. Another 30 per cent are financial institutions, which have direct exposure to the resource sector.

The problem with home bias became crystal clear last year when, after two years of double digit gains, the TSX Composite Index suffered an 11 per cent loss. Until then Canada had been outperforming most developed countries. The tide turned in 2011 when the TSX Composite lagged the world and it could be facing the same fate this year.

How to find the right balance

Getting the right mix of foreign holdings in your portfolio isn't as easy as making it 97 per cent foreign. Most investment advisors agree a certain degree of home bias is good.

For starters, investors have an advantage in holding stocks they are familiar with — and what's more familiar than your bank, telecom company or corner gas station?

One or all of the six major Canadian banks, telecom giants like BCE, Rogers Communications or Telus and integrate energy companies like Suncor are good examples.

Second, since most of us reside in Canada it's good to hold stocks that deal in Canadian dollars. A larger foreign stake is good for Canadians who spend a lot of time outside the country and need to withdraw money in a foreign currency.

How to own a piece of the world

Ironically, resource related stocks have a hidden hedge against home bias. Commodities are priced in U.S. dollars, the U.S. dollar is the global reserve currency, and commodity prices are directly linked to the global economy.

That means resource revenue and profits are directly linked to the global economy.

But that's not enough to strike that crucial balance between domestic and foreign equities. The simplest way to own a piece of the world is through a global equity mutual fund where a team of portfolio managers roams the globe looking for good investments.

International equity mutual funds focus on countries outside Canada and the United States. Considering our unique relationship with the U.S. it may be better to hold a U.S. equity fund in addition to an international equity fund. Many big U.S. public companies have significant operations around the world, which limits single country risk.

There are also mutual funds available that focus on specific countries or regions such as the Pacific Rim or emerging markets.

If you want to save on fees buy into exchange traded funds that are tied directly to specific country or regional indexes — including the mother of all indexes, the MSCI World.

You can go it alone by investing in U.S. based multinational corporations that are expanding in some of the world's hottest markets. Let companies including General Electric, Caterpillar, Microsoft and Apple do the market research and assume the risk. In many cases you will be rewarded with U.S. dollar dividends.

Some of the companies with the best exposure to emerging markets right now are consumer staples — manufacturers and distributors of food, non-durable household goods and pharmaceuticals. You can find big-name consumer staple companies on your local grocery store shelves, including Campbell Soup, Nestle, Kraft Foods, Colgate-Palmolive and even the store itself, Wal-Mart.

The Federal government has also recently allowed U.S. dollar accounts in RRSPs and tax free savings accounts. Buying U.S. stocks in U.S. dollars is a great way to hold value against a fluctuating Canadian dollar.

A large U.S. dollar account also comes in handy if you are spending a big part of your retirement outside of Canada.

What about bonds?

Bonds or other fixed income products are another story. The kind of low-risk, quality bonds suitable for a retirement portfolio yield similar returns around the world. Loading up on foreign bonds could be exposing your investments to unnecessary currency risk.

When it comes to bonds, there's no place like home.