Investing giant Vanguard found in a recent study that just more than 50 per cent of the stock market exposure in Canadian investor portfolios is allocated domestically. That’s down from 67 per cent in 2012, a significant improvement. But Vanguard thinks Canadians are still putting their portfolios at risk through their home bias.
The cure for home bias is global diversification, but it brings us to a weightier risk. It’s overemphasis on the U.S. market, which has been nothing less than stunning in the past five years. The S&P 500 has an average annual total return for the five years to May 31 of close to 16 per cent, and the 12-month gain is around 28 per cent.
Back in the 1990s, a more speculative tech boom produced a series of massive returns for the S&P 500. The Still, it’s fashionable to be down on the Canadian economy and stock market right now, and not just because of comparisons to markets in the United States and elsewhere in the world. Questions are being raised about our weak economic productivity compared to the United States and the lack of action from government and businesses to address this issue. In a future column, I’ll look at what Canada’s productivity problems mean to your personal finances.
Vanguard says Canada accounts for about 2.7 per cent of stocks globally, but a realistic default mix for your stocks could be one-third Canada, one-third United States and one-third outside North America. Another thought on diversification in mid-2024: Consider bonds.