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Follow These Tips and You Too Can Easily Beat the TSX

Joey Frenette

After a decade of meagre returns, the S&P/TSX Composite Index (TSX:^GSPTSE) remains an unattractive place to invest for foreign and domestic investors alike. In a recent interview conducted by BNN, Kevin O’Leary re-emphasized his distaste for the Canadian markets, noting that “direct investment in Canada is collapsing” and that uncompetitive business tax rates will continue to make Canada an unattractive place to put capital to work.

It’s not a mystery that Canada isn’t the most attractive place for anybody to invest right now. The TSX was in 77th place (out of 93 global indices) with its ~6% decline for Q1 2018. That’s just abysmal! While many Canadians have a large chunk of their holdings in names south of the border, I think Canada remains an attractive place to invest for value-conscious stock pickers who have the time to navigate the markets in search of wonderful gems that are buried beneath the dirt.

The grass really does seem greener on the other side of the fence; however, the same could be said for U.S. investors, as concerns over frothy U.S. stock valuations remain, even after the recent correction.

The case for remaining in Canadian stocks

There are many reasons why a Canadian investor would want to remain in TSX-traded stocks. There’s a dividend tax credit for non-registered accounts, you won’t get dinged by foreign dividend withholding taxes for TFSAs, and you won’t have to deal with the instant pain as you swap your loonies for greenbacks at what remains an underwhelming rate for Canadians, despite the recent weakness in the U.S. dollar versus the broader basket of global currencies.

While investing mostly in the U.S. may be a wise long-term decision for passive index investors based out of Canada, I think do-it-yourself stock pickers have the ability to easily crush both the TSX index (or the S&P 500) without needing to set foot in foreign markets.

It’s really not that hard to beat the TSX if you focus on high-quality businesses like Bank of Montreal (TSX:BMO)(NYSE:BMO) that generate ample amounts of cash flow and reward shareholders with consistent and generous dividend increases over a prolonged duration of time.

Sector diversification is key for Canadian stock pickers

To remain a Canadian investor, however, I firmly believe you need to be an individual stock picker and avoid Canadian index funds or ETFs that do not offer proper diversification across various sectors. With an index, you’ll get instant overexposure to the energy and financial sectors, and barely any tech, healthcare, or consumer staple names.

The TSX is so overexposed to the energy sector that it’s disturbing, but that doesn’t mean your portfolio should also be heavily weighted in energy names. In fact, you don’t even need to own any Canadian energy stocks at all if you didn’t want to, and you’d still do well.

With an individually constructed portfolio, you can adjust sector weightings to your liking, supplementing with U.S. stocks if you have trouble finding opportunities across sectors the TSX is lacking in.

With this in mind, Canadian stock pickers should have no problem crushing the TSX index and giving the S&P 500 a good run for its money. Pick your own stocks, stay diversified across sectors, always consider value and quality, and you’ll handily beat the TSX without even breaking a sweat.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.