Even with Canada’s strong performance, it still makes sense
Global diversification is one of the “golden rules” when it comes to investing in your Registered Retirement Savings Plan (RSP). But like many Canadians, you may be wondering why it’s so important to diversify your RSP with global investments. After all, Canadian markets have been enjoying great returns relative to many other markets around the world for the last several years.
However, there are some good reasons for investing outside of Canada – and while it may come as a surprise, the recent strong performance of Canadian markets is one of them. Canadian stocks have enjoyed such strong performance that many investment analysts believe they are no longer a “good value” compared to stocks in other major global markets, such as the U.S. In other words, you may be able to buy stocks at a better price relative to their value elsewhere in the world.
Canada’s strong performance also means that your RSP may now hold a greater percentage of Canadian investments than it did a few years ago. For example, say you had diversified your RSP a few years ago with 70% Canadian investments and 30% global investments. But now, due to its relatively strong performance, the Canadian component of your RSP might account for 80% of your RSP’s market value, while the global component has dropped to only 20%.
Why is this important? Because setting – and maintaining – the right balance of global and Canadian investments helps reduce risk. Diversifying globally helps reduce risk because stocks in different parts of the world don’t always go up or down at the same time. When you have a globally diversified RSP, weaker performance in any single part of the world – including Canada – can be offset by stronger performance in another.
Canada’s markets are also concentrated in just a few industrial sectors – namely, the Financial, Materials and Energy sectors. Just as you can diversify by geographic area, you can also diversify by industry sector to reduce risk. So when you forgo global stocks in your RSP, you not only forgo the risk-reduction benefits offered by global diversification – you also forgo the risk-reduction benefits offered by sector diversification.
This article is supplied by Angelo D’Amico, a Vice President, Portfolio Manager with RBC Dominion Securities Inc. Member CIPF. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Angelo D’Amico can be reached at 514-878-5196.
