For Canadian investors, diversification is a word that is often misunderstood. For many, a portfolio may be diversified if one finds a way to divide one’s assets across various asset classes, reducing the idiosyncratic risk of owning stocks focused in one sector of the economy by putting one’s eggs in a variety of different baskets.
While sector-specific diversification is a noble goal and should be sought after by all investors, what is perhaps less emphasized is the idea of investing outside Canada for outsized returns. The reality remains that the TSX makes up approximately 3% of the global stock market, meaning there are literally a world of options available out there for investors to take advantage of.
Whether in the U.S. market, Asia, Europe, or Latin/South America, finding world-class companies can be easier to do when one’s viewpoint is a global one rather than a Canada-only or North America-only strategy.
The temptation to invest a higher portion of one’s income closer to home makes sense. After all, we know companies that we interact with on a daily basis.
An e-commerce company in China may make less sense to us than an Amazon, or a bank in Chile might not be as easy to understand as a bank down the street, but having the audacity and the openness to look outside the proverbial box is one way to increase portfolio returns over time, given the higher than average growth rates seen in emerging markets and developed markets outside Canada.
Invest wisely, my friends.
