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Client Question: Why should I own foreign investments?

Canada may be a great place to live but according to 2017 data from the IMF the Canadian economy makes up only about 1.4% of global GDP. By investing only in Canada you are turning down an opportunity to invest in the other 98.6% of the global economy.

Beyond that Canadians face two major problems at home:

  1. The TSX index isn’t diversified – financial and resource stocks make up 65% of the index. Remember that correlation risk is the biggest concern when creating portfolios. The higher the correlation, the greater may be the stock losses.
  2. The Canadian dollar’s dependence on oil and gas prices leads to greater currency volatility. If you earn only Canadian dollar income, whether or not it’s employment or pension income, you are exposed to Canadian dollar fluctuations.

For example, the Canadian dollar began its descent in 2014 from one dollar to the USD to today’s 77 cents on the back of declining oil prices. As a result, Canadians’ spending power relative to the rest of the world fell 23%. In other words, if food costs in 2014 were $1.00, they’re now $1.23.

That’s where foreign investments help offset the decline in spending power. If your investments are in other currencies and the Canadian dollar falls, those investments will be worth more, thereby creating a natural hedge to your spending power.

The bottom line is this: When the Canadian dollar is strong (at par), buy foreign investments. When the Canadian dollar is weak (as it was in 1995 during the Quebec Referendum at 60 cents), buy Canadian investments and wait for the cycle to turn.