Good news for jet-set investors —International diversification still rules

There’s something to be said about the jet-set life. When you’re taking off for a week in Paris, even the red-eye sounds chi-chi. And when our loonie is strong, we tend to splurge a little more when we’re abroad, making it all that much more glamorous. We can’t help but wonder, though, if it works the same with investments. Should a strong Canadian dollar fuel our jet-set investing style, or should we stay put and take in more of what our own country has to offer?

Does it still make sense to invest abroad? The answer for most of us is a resounding yes.

For the past few years, our dollar has risen steadily against its U.S. counterpart. At the same time, Canadian stocks have done well, thanks to high energy prices, demand for natural resources, a strong economy and low inflation. (If that sounds like we’re bragging, we are. After winning double hockey gold at the 2010 Olympics, we’re allowed.)

Given this, does it still make sense to invest abroad? The answer for most of us is a resounding yes. And some of the reasons are the same as when the loonie was worth only 65 cents U.S.:

• Diversification. It’s impossible to consistently predict market turns. That’s why prudent investors spread investments across asset classes and geographic areas. When one area declines, others may rise. And the Canadian market consists mostly of resources, commodities and financial stocks. In order to gain access to other important sectors, such as pharmaceuticals and healthcare, you need to look outside our borders.
• Investment selection. Canada accounts for only about 3% of the world’s stock market capitalization, and many top global companies are available only through foreign markets. (It’s probably the same with your favourite fashion labels, actors and gourmet goodies.) So if you limit your holdings to Canadian companies, you’re effectively cutting yourself off from 97% of the world’s investment opportunities.
• Currency hedge. The Canadian dollar is strong right now, but it hasn’t always been that way. If you want to protect yourself from the next decline, you need to hold investments that are denominated in other currencies. Foreign investments offer a cushion against long-term currency risk — a big concern if your retirement plans include wintering in another country.
• Booming foreign markets. Canada’s growth prospects pale in comparison with such emerging powerhouses as China and India. While globalization has made countries more interdependent, they still vary in economic activity and outlook.
• Effect on some of your Canadian investments. While the stronger Canadian dollar is beneficial for Canadian consumers and those travelling to the U.S., it can be detrimental to Canadian companies that export their finished products — because it makes them more expensive to buyers elsewhere. By diversifying, you protect your portfolio from the effect of currency fluctuations on the Canadian companies you’re invested in.

Invest in a professional

The proportion of foreign investments that’s right for your portfolio will depend on your objectives, time horizon and investor profile. Keep in mind that, as with Canadian investments, the risk and rewards associated with foreign investments vary widely.

That’s why trusted professional advice is a must. That way, you can get the help you need to choose the right foreign investments in the right amount to meet your objectives. Remember, spanning the globe with your investments - while also proudly supporting your own country - is the smart woman’s way to travel richly. Grab your Louis Vuitton luggage and go!

 

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