2023 is the best of years and the worst of years so far depending on how well your retirement portfolio is diversified.
For the many Canadians who cling to the old Toronto Stock Exchange stalwarts through Canadian equity funds, pension plans or directly, it’s been a dismal year.
CANADIAN CARNAGE
The normally reliable S&P/TSX Utilities Index has lead the downward charge, shedding over 10 per cent of its value since the start of the year.
To make matters worse, the Canadian stocks that retirement investors have come to rely on for steady income flows have been hit hardest as higher interest rates present safer alternatives in fixed income.
The S&P/TSX Real Estate Index, which includes the real estate investment trusts (REITs) that are staples in many retirement portfolios, is down by over seven per cent.
Even the big Canadian banks and insurance companies, renowned for growing profits and sharing the wealth with shareholders, have lost value as the S&P/TSX Financials Index posts a 3.5 per cent loss.
The S&P/TSX Energy Index, which holds Canada’s biggest oil and natural gas producers, managed to salvage a 2.4 per cent gain so far this year thanks mostly to a mid-year spike in crude oil prices.
HOW HOME BIAS COULD BE KILLING YOUR PORTFOLIO
If your portfolio looks like the TSX so far this year it could be suffering from an affliction called “home bias”. Like any bias, home bias is generally an irrational prejudice in favour or against one thing, person, or group compared with another.
In investment terms that means skewing toward Canadian equities simply because you are Canadian and are familiar with Canadian companies.
Any investment advisor will tell you it’s good to have a certain degree of home bias because Canadians should be familiar with their investments and their portfolios should skew toward where they live and draw their retirement funds.
However, it’s important to keep in mind Canadian publicly traded equities account for less than three per cent of all equities traded globally. Even within that tiny sliver of the world, two-thirds of Canadian equities are tied to the financial and resource sectors, which explains the poor performance from the TSX so far this year.
GLOBAL INVESTORS REAP REWARDS
If your portfolio has grown significantly in 2023 so far, it’s likely because it is well diversified beyond Canada. For most Canadians that means U.S. equities because they account for half of globally traded equities and span across all the major sectors.
So far this year, the benchmark S&P 500 has grown in value by 14 per cent. Many of the same sectors including real estate and banks are well under water but sectors like semiconductors are pulling the index up with a gain of 80 per cent. Auto manufacturers and home builders are also posting major gains.
The point is, gains in some of the best performing U.S. sectors more than offset losses in Canada’s worst performing sectors.
LOOK FOR OPPORTUNITIES TO DIVERSIFY
Of course, there are years when Canadian equities outperform U.S. equities and that’s why it’s important to always be diversified.
But portfolio diversification is not something you should do overnight. The biggest impediment to investing outside Canada right now is the weak Canadian dollar. Besides, you don’t want to be selling investments when they are down.
One domestic option to diversify away from Canadian equities is to take advantage of higher bond yields by shifting assets toward fixed income. Guaranteed investment certificates, as an example, are yielding over five per cent annually – far higher than big bank dividends without the risk of further market losses.
If you want to be ready to expand your portfolio once the Canadian dollar is trading higher in relation to the U.S. dollar, you should be ready to invest with U.S. dollars. Fees on Canadian-dollar hedged foreign mutual funds and exchange traded funds (ETFs) are notoriously high.
That could mean setting up and contributing to U.S. dollar trading accounts inside your existing registered retirement savings plan (RRSP) and tax free savings account (TFSA) over time.
Timing the right opportunities to make the shift to a more global portfolio can be tricky, and that’s where a qualified investment advisor can be a big help.