The only "free lunch" in investing

Why going global reduces volatility and improves returns.

Paul Kaplan 9 June, 2014 | 6:00PM

Suppose a friend with no prior investment experience inherited a million dollars and was excited about a tech stock that his brother-in-law recommended. You probably would advise him not to put the full amount in that stock, but rather to invest in a diversified portfolio of stocks and other asset classes.

Now suppose that instead of an individual stock, your friend was considering investing his windfall entirely in a diversified Canadian equity ETF. You probably would advise him to diversify across asset classes, but would you also advise him to invest in equity markets outside Canada? And if so, how much?

Investors around the world heavily favour their home countries in their investment portfolios, especially in the equity portions. Canadian investors are no exception. While this is less of an issue for U.S. investors (since the U.S. equity market is diversified across economic sectors and represents a large portion of the equity markets globally), it is (or should be) an issue for investors in countries with small equity markets. That's especially true for countries, such as Canada, whose markets are concentrated in a few economic sectors.

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Paul Kaplan

Paul Kaplan  Paul Kaplan is Director of Research for Morningstar Canada.

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