Time for a rebalancing act
Don Coxe
National Post
Since Finance Minister Paul Martin announced a liberalization of RRSP foreign content rules (liberal in its former sense of increasing freedom, rather than in its modern sense of increasing government controls and taxes), Canadians have been thinking about RRSP tinkering.
At first blush five percentage points doesn't sound like much. But it is a 25% boost in permitted investment abroad, and that can have huge implications over the life of an RRSP.
Individual needs and risk tolerances are as personal as toothbrushes, so there is no universal formula for an RRSP. With that caveat, let me offer a few useful concepts as you begin restructuring. For purposes of this discussion, I assume you will use mutual funds. (Yes, I could be biased, because the organizations I work with manage the First Canadian Funds, and I manage the First Canadian US Value Fund.)
First, your foreign exposure should be exclusively equities. Global bond funds make sense only in the taxable portion of your portfolio. Why? Because Canadian equities are just 1.7% of the value of publicly traded stocks in the world. With that precious 25% you need to tap the world.
Canadian equities on a currency-adjusted basis were, until last year, the worst long-term performers within the G-7 for the period since Ronald Reagan became U.S. president in 1981. (That was the date when true liberalization began in the industrial world, setting the stage for the greatest economic and stock market performance in history.) Although I have been bullish on Canada relative to most foreign markets for more than a year, I certainly do not recommend 100% Canadian commitment.
Second, try to achieve true diversification, by investing globally. Yes, when Wall Street has heartburn, global markets feel pain. But annual returns for individual stock markets differ so widely that you need broad exposure.
Third, that means resisting habit and CNBC: Don't use all or nearly all your limit to buy U.S. equities. Canadians have this love/hate relationship with the U.S., as reflected in their historically heavy commitment to U.S. stocks compared with international equities. Apart from the fact that U.S. stocks are about half the value of global equities, implying other opportunities, the U.S. and Canadian economies are now closely correlated through the success of NAFTA. With 85% of Canadian exports going to the U.S., the Canadian stock market has become another way to play the U.S. economy. If the U.S. economy were to falter, U.S. equities would slump at a time Canadian stocks were getting hit hard.
Fourth, you should consider a global sector fund that invests only in science and technology stocks wherever the companies are headquartered. You want to share in the performance of the world's leaders in information technology, telecommunications, and health care, whether the companies come from the U.S., Germany, Finland, Japan, Taiwan, Korea or India.
Fifth, consider including an emerging markets fund for 10% or so of your foreign content (or about 2.5% of total equity funds). That reflects the weight of these markets in global rankings, and gives you great diversification in risky and illiquid markets with one purchase. No one has shown a consistent record of success in picking which of these markets will win biggest (or lose least). Buy 'em all, and then you won't lose too much money and sleep when you read of the next coup, earthquake, war or financial crisis in some exotic land.
Sixth, ensure you have good weighting in Japan and Asia. Growth in that region was fastest in the world from 1975 to 1990. After a variety of setbacks during the 1990s related to bad politics and deflation, the region is reviving (although Japan is still struggling). East Asia as a whole has favourable taxes, great demography, strong technology companies, superb work ethics, high savings rates and more science students in elementary and secondary schools than the rest of the world combined.
Finally, discipline yourself: You are investing globally to build your wealth over time from the best the world has to offer, just as you buy consumer goods based on relative price and value, whether they are made in Canada, the U.S., Japan or wherever. Don't get carried away by either wondrous results or terrible results in a region.
It's your world. Get used to it. |
