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The importance of global diversification

Many Canadians prefer to invest a large share of their portfolios in Canada, and this is likely not optimal.

Shehryar Khan, CFA 8 May, 2018 | 5:00PM
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Shehryar Khan: We all love to travel. Visiting different parts of the world allows us to learn and experience different cultures, and to have experiences that we could never otherwise have if we did not venture beyond our borders. Enjoying what the world has to offer doesn't mean we don't appreciate the virtues of our own country; it just means there's more out there than what's here at home.

When it comes to investing, however, it seems our fellow Canadians prefer to invest a large share of their portfolios in Canada, and this is likely not optimal. Canada accounts for less than 4% of the MSCI World Index, which means that investors are missing out on, literally, a world of opportunities. Investing abroad allows us to lessen some of the heavy exposure to commodities and financial services that is unique to the Canadian economy, and also to own some wonderful businesses that just happen to operate outside of Canada. For investors seeking to round out their portfolios with foreign exposure, one avenue is to consider International, global and emerging market equity funds, which can invest anywhere in the world.

Choosing the fund is not where the analysis stops however. When making the choice of what foreign equity fund suits you best, make sure that, if choosing an actively managed fund, the manager's style is one that that is appropriate for you. Compared to a passive ETF, active managers will also favour or avoid certain countries or regions, which is only good if they turn out to be right.

Finally, currency is another aspect to consider, as many firms offer hedged and unhedged versions of their funds. Just as it when it comes to traveling, being well prepared will ensure you reap the rewards of the journey.

For Morningstar Investment Management, I’m Shehryar Khan.

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Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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