is the spread of investment risk by buying different securities
in different companies in different businesses in different
locations at different times.
risks can be reduced by choosing various investments in a
like class of risk. For example, business risk can
be minimized by buying shares in more than one company. Interest
rate risk can be reduced by buying bonds with different
maturities. Inflation risk can be minimized by including
equities in an investment portfolio. Equities do not offer
safety of principal but historically have provided the highest
real return of any class of investments. Inclusion of fixed
income investments in a portfolio offsets the lack of safety
of equities. While all foreign holdings include exchange rate
risk, international diversification minimizes the market risk
of having a portfolio’s performance dependant on the systematic
risk of the Canadian economy.
Diversification through Mutual Funds
is possible through investment in mutual funds. Mutual funds
are pools of money from thousands of investors; Professional
portfolio managers make their living by managing these large
pools of other people’s money. Fund managers attract investors
by devising investment strategies that will address specific
investment objectives. The mutual fund’s prospectus describes
the investment policies and strategies the fund follows.
Diversification through Increased Foreign
increase your foreign exposure? The answer is very simple:
lower risk and higher returns. Over the last twenty years
or so, the return on the Canadian stock exchanges has been
somewhat lower that that of the stock exchanges in the United States and many other countries. There are many reasons for
this including the devaluation of the Canadian dollar, the
dependency of the Canadian economy on resources and the Bank
of Canada’s battle against inflation.
stock exchanges make up only 2 to 3% of the world’s stock
market capitalization. Canadian stock exchanges provide only
a very small portion of the investment opportunities in the
world and until recently, they have not historically performed
well relative to some other countries’ stock exchanges.
an investor should be able to pursue investment opportunities
anywhere in the world
in search of the best return for an acceptable degree
of risk. If those opportunities exist in
Canada so much the better. Reality however is that relatively few individuals
in Canada are aware of the implications of this important aspect
of investment planning.
fact is ownership in foreign investments offers the prospect
of higher investment returns, increased diversification, while
lowering investment risk.
there are many foreign investment products that are fully
eligible as 100% Canadian content held inside your registered
retirement plan. It is now possible to increase your foreign
exposure well beyond your 30% foreign content limit in your
registered retirement plans.
contained in this commentary is designed to provide you with
general information only, and is not intended to be comprehensive
advice applicable to the circumstances of any individual. We
strongly urge you to seek professional assistance before acting
upon information included herein.