When it comes to investing, it’s not surprising that many Canadians tend to favour domestic companies whose products and services they are most familiar with. This inclination is called “home-country bias.” It is the tendency to invest close to home and is not unique to Canada. In fact, as this chart shows, it is a worldwide phenomenon.
Home country bias by country
Source: Global index weight reflected by country’s weight in the MSCI All Country World Index as of May 31, 2019. Investor holdings in domestic market sourced from the IMF, as of December 2014.
Although investors may feel more comfortable choosing investments that are close to home, home-country bias can leave them at greater risk if their domestic economy falters. There are two reasons for this higher risk:
1. A smaller field of opportunity
Canada represents only a small fraction of global GDP and just over 3%1 of the world’s capital markets. This means that 97% of the world’s investment opportunities are to be found outside of Canada. An overemphasis on one country is the financial equivalent of having all your eggs in one basket.
2. Concentration risk
Canadians who only invest at home risk limiting their opportunities and face a greater concentration risk in their portfolios. For example, unlike the rest of the world, the Canadian stock market is heavily dominated by companies in three sectors: Energy, Financials and Materials.
Concentration risk: Canada in comparison to the world
To counter this, investors can look abroad to achieve greater diversification.
Canada can be a great place to invest. But many Canadians may not realize just how much of their personal wealth is in Canada or tied to its economy. In fact, the average Canadian has approximately 90% of their total assets in Canada. These assets can include a home, savings, investments, employment income and pensions (both private and government).
|
|
40.6% |
Real estate |
|
|
18.6% |
Funds, stocks and bonds (Domestic) |
| 26.5% |
|
7.9% |
Funds, stocks and bonds (Foreign) |
|
|
15.8% |
Pensions, insurance, CPP/QPP |
|
|
11.4% |
Cash and GICs |
|
|
5.6% |
Private mortgages and businesses |
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An easy way to start is to invest some of the new contributions you make to your investment account(s) in other geographical regions and sectors. By diversifying globally, you may increase your return potential, while also lowering volatility, as the historical chart below illustrates:
“Investing in a globally diversified mix of equities and fixed income can help steer you through various market conditions, including short-term market declines in any one asset class or region”
Sarah Riopelle
VP and Senior Portfolio Manager, RBC Global Asset Management
A broadly diversified global portfolio has the potential to smooth out your investment experience. It can reduce the risk of losses and enhance your potential returns over the long term.
Additional resources