Tag Archives: home country bias

Lessons learned in diversification: reducing my Canadian home country bias

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub
Many financial advisors, analysts and investing gurus alike argue in favour diversification.

That said, there are some experts who claim owning about 30-40 individual stocks, in various industry sectors, will provide modest diversification to mitigate portfolio risk.

You can find some of those expert opinions on how many stocks are enough in this post.

Dedicated readers of this site will know I’m a fan of portfolio diversification myself, since I adhere to some personal rules of thumb when it comes to my DIY portfolio. Here are some of those rules of thumb:

  • I strive to keep no more than 5% value in any one individual stock.
  • I’m working on increasing my weighting in low-cost ETFs over time, more specifically, owning more of the U.S. market since I’ve had a long-standing bias to Canadian dividend payers in my portfolio.

You can always review some of my current holdings on this standing page here.

Why diversification?

Portfolio diversification aims to lower the volatility of my portfolio because not all asset categories, industries, nor individual stocks will move together perfectly in sync. By owning a large number of equity investments in different industries and companies, and countries, those assets may rise and fall differently; smoothing out the returns of my portfolio as a whole.

“There is a close logical connection between the concept of a safety margin and the principle of diversification.” – Benjamin Graham

As I contemplate semi-retirement in the coming years, this is what I’m considering for cash on hand to support any bearish equity markets or to ride out unfavourable market returns.

Diversification: applying some knowledge and lessons learned

With 2020 in the rear-view mirror, and a trying investing year for many to say the least (!), I decided to make a few portfolio changes so I could embrace diversification more while simplifying my portfolio as those needs for capital preservation draw nearer.

Today’s post outlines some of those changes, by account, and why.

1.)TFSA

I’ve admittedly been wrestling a bit for what to invest in, inside this account for the current 2021 contribution year.

I know I need some more U.S. and international exposure even with the recent comeback in many of my Canadian stocks since the market calamity began in March 2020.

In looking at my sector allocation to the oil and gas industry, I decided to cut complete ties in late-2020 with Inter Pipeline (IPL) after their dividend cut of 72% earlier in the year. You can see some of that dividend news I reported in this previous dividend income update.

I will use that money, along with new TFSA contribution room in 2021 to invest in some all-world ETF XAW amongst other investments.

XAW will provide far less yield inside my TFSA going-forward, which will impact the income generation machine that is my TFSA, but more importantly I think this fund will provide some much needed total return growth from ex-Canada.

XAW iShares December 2020

2.) RRSP

In a taxable account, Canadian dividend paying stocks earn favourable tax treatment thanks to the dividend tax credit. So, I keep those stocks there and see no reason to change that approach. Continue Reading…

Solving the home country bias in Canadian portfolios

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Canadian investors tend to suffer from home bias – a preference to hold more domestic stocks over foreign equities. This is actually true of investors in most countries, but it’s particularly troubling in Canada where our stock markets are highly concentrated in the financial and energy sectors.

The federal government could be partially to blame for our home bias tendencies. As recently as 2005 the government imposed a limit on the amount of foreign content allowed in RRSPs and pension plans. This cap was introduced in 1971 to help support the development of Canada’s financial markets but was scrapped in the 2005 federal budget, freeing Canadians up to invest abroad.

Sizes of World Stock Markets

It’s well known that Canada makes up less than 4 per cent of global equity markets (2.7 per cent, to be exact), yet 60 per cent of the equities in Canadian investors’ portfolios are in domestic securities.

Even most model ETF and index fund portfolios have Canadian investors overweighting domestic equities, holding anywhere from 20 to 40 per cent Canadian content.

Canadian home country bias

The result is a portfolio that is more volatile and less efficient than one with international equity diversification. Indeed, investors with a Canadian home bias are taking risks they could have diversified away by increasing their allocation to global equities.

My two-ETF portfolio

So how does my portfolio stack up? When I switched to my two-ETF solution, made up of Vanguard’s VCN (Canadian) and VXC (All World, ex-Canada), I chose to have an allocation 20-25 per cent Canadian stocks and 75-80 per cent international stocks.

That allocation would be relatively easy to monitor and rebalance if it was simply held in my RRSP. Whenever I added new money to my RRSP, I’d simply buy the ETF that was lagging behind its initial target allocation.

But I complicated things recently when I started contributing again to my TFSA. I wanted to treat my TFSA and RRSP as one total portfolio and keep the same asset mix in place. Since my RRSP was much larger than my TFSA, I decided to hold mostly foreign content (VXC) in my RRSP while putting Canadian stocks (VCN) in my TFSA.

This worked out great for several years but now I’ve run into a second problem; I’m contributing to my TFSA at a much faster pace than my RRSP. That’s because I’ve maxed out all of my unused RRSP contribution room and, due to the pension adjustment, I get a measly $3,600 per year in new contribution room.

Meanwhile I still have loads of unused TFSA contribution room and so I’ve been socking away $12,000 per year for the past two-and-a-half years. I hope to continue at that pace for many more years until I’ve completely caught up on all that available contribution room.

The result is a portfolio that is becoming increasingly more tilted to Canadian equities. At this rate, if I continue filling my TFSA with VCN, my portfolio will have more than 30 per cent Canadian content in five years, and nearly 40 per cent Canadian content in 10 years.

My Home Bias Solution

I’m considering a change to my two-fund portfolio. With the introduction of Vanguard’s new all-equity asset allocation ETF – VEQT – I could turn my two-fund solution into a true one-fund solution and make investing even more simple. Continue Reading…

Putting a ROBO adviser to the test, Part 2 (b)

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Cute Robot

…. continued from Tuesday. Click here for Part 2 (a)) …

By Aman Raina, Sage Investors

Special to the Financial Independence Hub

CANADIAN STOCKS (PORTFOLIO WEIGHTING 10%)

ROBO Goal: Ownership share in companies based in Canada. Often over-represented in Canadians’ portfolios, but a major part of long-term returns.

ETF Used: iShares Capped Composite TSX Index (XIC) MER 0.05%

The investment seeks to replicate the performance, net of expenses, of the S&P/TSX Capped Composite Index. The index is comprised of the largest (by market capitalization) and most liquid securities listed on the TSX, selected by S&P using its industrial classifications and guidelines for evaluating issuer capitalization, liquidity and fundamentals.

Another go-to vanilla ETF, XIC,  provides exposure to the S&P/TSX Composite, which skews heavily into Canadian financials and commodity stocks. One bad habit Canadians investors get into succumbing to home country bias —  holding way more Canadian companies than foreign companies. The Canadian stock market represents only 6 per cent of the global market so it is positive to see ROBO allocating a  smaller weighting to Canadian stocks. It’s sad to say that in terms of investing opportunities, there are way way more of them outside Canada.

RISK-MANAGED STOCKS (PORTFOLIO WEIGHTING 10%) Continue Reading…