Canadians’ home investment bias
According to Vanguard research, the current bias towards domestic holdings is approximately "16 times overweight." This can pose significant problems, including:
- Portfolios overweighted in Canadian stocks are more volatile
- Overexposure to the Canadian equity market can lead to less efficient portfolios with security and sector concentration risk
- Allocating too much of your investments to one country can lead to greater portfolio volatility and a bumpier ride for investors
How much exposure should investors aim to hold?
Canadian investors have a long-standing belief and pride with investing close to home. It's a sound strategy if that exposure is moderate.
"Based on our research, we see a reasonable equity balance of around 30% home bias, in Canadian securities, and 70% invested in non-domestic markets," said D'Angelo.
Canadian equities are only 3.4% of the global market. But the top 10 Canadian holdings make up almost 37% of the equity market, compared to 16% of the global market, leading to what Vanguard calls “idiosyncratic risk.”
The Canadian equity market is also significantly biased towards the energy and financials markets, and underdeveloped in the materials and industrials sectors.
Canadians are not the only investors who need to reconsider this home country bias. Investors in Japan, Netherlands, Switzerland, the UK, Australia and the US, also began to drop their home base bias with the average weight of domestic equities falling from a high of 67.1% in 2012 to 37.7% in 2022 (for investors across Canada, Japan, Netherlands, Switzerland, the U.K., Australia and the US).
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Invest NowHow to approach your investment portfolio according to Warren Buffett
Finance guru Warren Buffett believes that investing in low-cost, diversified exchange-traded funds (ETFs) offer investors an efficient and cost-effective way of creating a diversified portfolio.
Buffett specificaly likes index funds because they are relatively low cost compared to actively managed funds, reasoning that: "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
Elsewhere, the Oracle of Omaha believes that an investor should keep fees low and avoid the temptation to try and beat the market. As he often states, investors need to think twice about where they put their money and not dwell on dramatic headlines.
Buffett recommends that average investor to consider low-cost exchange-traded funds (ETFs), which trade like stock, but offer investors shares in a basket of equity holdings — allowing an investor the liquidity of stock trading, the diversification that comes with pooled funds but at a very competitive and efficient cost.
ETFs that offer global diversification
If you'd rather invest in just a few ETF but get exposure to assets outside of Canada's borders, consider the following balanced funds (with 60% in stocks and 40% in bonds):
| Fund | #1 Geo | #2 Geo | #3 Geo | #4 Geo | #5 Geo |
|---|---|---|---|---|---|
| Vanguard Balanced ETF Portfolio (TSX:VBAL) | US: 26.9% | Canada (bonds): 23.8% | Canada: 18.1% | Global (developed): 10.8% | Global (bonds): 8.2% |
| iShares Core Balanced ETF Portfolio (TSX:XBAL) | Canada: 44.8% | US: 34.9% | Japan: 3.7% | UK: 2.4% | France: 1.5% |
| BMO Balanced ETF (TSX:ZBAL) | Canada (bonds): 27.4% | US: 27.4% | Canada: 15.1% | Global: 11.5% | US (bonds): 11.4% |
Start with an online brokerage account
To start, investors need access to an online investment platform that offers the ability to trade, as well as the option to review their portfolio asset mix. Find the latest online brokerage promotions, or select an account from the top investing platforms in Canada. Good options include:
- Qtrade: Customers get free trades on hundreds of ETFs, while stock trade fees can be as low as $6.95 for elite account holders. The best part is that opening a new account can earn you up to $150 cashback. Open a Qtrade account.
- Wealthsimple: Pay $0 commission on stock trades and just 1.5% FX fees on USD trades for accounts with less than $100,000. Open a Wealthsimple Trading account and get a $25 rebate when you add $150 or more to your trading account.
- Questrade: Pay $4.95 to $9.95 per stock trade. Buy ETFs commission-free. Transfer funds from another brokerage account for free plus pay no annual fees on RRSP and TFSA accounts. Open a Questrade account.
— with files from Romana King
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