Canadians are proud people. We arepatriots, and sometimes to a fault. There is a belief that we live inthe bestcountry in the world (hard to argue not) but thiscan cloud some of our judgements.Specifically when it comes to how our investment portfolios are built.
Canada is fortunate enough to have afairly stable real estate sector. Our banking system has regulations in place tokeep this stable, however, inflation and rising interest rates combinedwith government mortgage policies could change this in the future. This isn’tto say there is a crash coming by any means, but some research done by the Globeand Mail in June of 2020 states that even before Covid, 47% of Canadians are already living paycheck to paycheck. What happenswhen inflation causes increased interestrates and many Canadians, not only aren’t able to save anything, but now can’teven pay their current bills? Would there be many Canadians who start towalk away from their mortgages or need to find abuyer? Could this flood the market and cause a decrease in value across the board? No one has a crystal ball, but there are variables that are taking place thatcould have effects on the stability of houseprices in Canada. Currently, principal residence in Canada is a tax free asset,either when it's sold or upon death for theestate. This could change in the future as there are rumblings that the federalgovernment is having in regards to coming up with aprincipal resident tax. On top of that, there are investors who have increased their real estate portfolio by acquiringother properties for rentals. Historically, this has been a fairly valuable investment (if managed properly). Mostinvestors invest locally. If we reference above and there is a change in value in their principal residence, it will likelyaffect their rentals as well. Are they truly diversified or uncorrelated? What options exist to truly diversify and have real estate assets that arecorrelated? We will get to that in a bit….
Canada’s overall economy and stockmarket returns have been extremely closely related to the energy sector. Ourdollar is strong when energy stocks are strong, and the TSX (Toronto StockExchange) traditionally has been directly correlated to the energy sector. Goodor bad, however you look at it, we know recently that federal and some provincial governments are putting in or want to put in policies that will prohibit Canada's ability to be a leader in the energy sectors,specifically the Oil and Gas industry. How will this affect the long termgrowth of Canadians stock portfolios as the bulk of Canadians? Are Canadians missing out on the bigger picture andother opportunities? Canadian banks andmutual fund companies' portfolios usuallyhave large holdings of Canadian companies, with the balance being Americanbased companies that are traded on those exchanges (Nasdaq and NYSE). How is all of thisdiscriminatory though? As of a report in2019, Canada only represents 3% of the world'sGDP. Canadian investors are missing outon massive opportunity and potential byworking with investments, institutions and advisors that are only accessing 3%of the world's Gross Domestic Product. In2020, the USA accounted for just under 16% of world's GDP, with that estimatedto decrease from now until 2026.
These numbers and projections shouldhave investors question “Am I discriminatory to investment options outside ofCanada and North America?”. The simple answer is no, not knowingly at least.The Canadian financial system has been built to invest domestic, supportdomestic. The world, however, has changed so much and we are living in an interconnected world.
So… What should you do as aninvestor to educate yourself on options that can help your portfolio properlygeographically diversify?
We are very fortunate to be living in this country and all that comes with it, but does it make sense to hold and try andbuild all your assets here? In my opinion,we need to look globally to properlydiversify and expand our portfolios to reach more of the global GDP. 3% just doesn’t cut it!
If you are curious about whatoptions exist and how to access the other 97%, reach out to me for a consultationat 780 966 5084 or cboyle@legacyfg.ca
1. Look at firms, advisors, who understand a globalapproach and have access to portfolios that are investing in emerging markets(China, Japan, India, etc)
2. Find firms that can invest in different types ofreal estate globally (residential, multi family, commercial, industrial)
3. Work with advisors and firms that are fullytransparent and open about the fees and don’t get into a situation where feesare paid to the advisor upfront. Thiscan limit your flexibility if you need to access or change your portfolio. This is referred to as Deferred Sales Chargein the industry.