Most of us suffer from country bias

As Canadian we are only 2% of the global economy, yet most Canadians only own Canadian stocks or mutual funds. They own all the banks, some oil stocks, maybe a few telephone/internet companies and that’s it. Most of us don’t think of how to re balance our portfolios.

Other, more adventurous investors, have some U.S. index funds.

I have heard many times, as an excuse for having such a strong home bias portfolio, that most companies in the TSX and the S&P 500 have an international exposure.

I don’t think that is a strong argument. I think that by having an internationally diversified portfolio, the total volatility is reduced and the earning potential is increased. Today, I don’t have the hard science to prove it, but I will come back, in a future post, showing strong backing for my opinion.

How do I construct my portfolio

Ideally, my portfolio is 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks. I don’t own bonds, and I don’t re balance. You can visualize how to re balance your portfolio with the Portfolio Visualizer tool, for free.

How do I re balance

Most adviser, portfolio managers or robot-advisers, sell the sector that has grown the most and buy the sector which has grown the least. They generally do that about once per year. Although some go as far as doing it every month.

In my opinion, all this rebalancing is unnecessary. If we believe that most markets are cyclical, and if we are planning to invest for the long-term, then at the end, everything should even out in a time period of 20 years or so.

If one of those sectors outgrow the other ones, by a lot, then we should feel lucky to have that sector and that it has grown so much. When we retire, can start by selling the sector which has outperformed the most.

Most of my investments are in my Tax-Free Savings account. I am allowed to add $5,500 to my account every year.  I put this investment in the lagger.

So far, for the past few years, I have put my new contributions in the Canadian part of my portfolio, because the Canadian market continues to underperform.  On the other hand, investment in the U.S. segment has continued to outperform.  I am very glad I haven’t sold part of a big winner to buy larger.

One day I will retire and I will begin to withdraw money to pay for my living expenses, at that time and at that time only, I will start selling the winner.

Let’s keep in mind that this is not an individual stock, this is a broad-based index. The chance for me to lose the money invested in the S&P 500 (for example) are almost zero. Constant rebalancing can decrease volatility, but it’s not the best strategy to maximize income.

Imagine that Emerging markets go through a high growth stage that last 100 years,  as it happened to the U.S. 200 years ago (the merging market of the time), then I would miss out on that growth potential.

And you? How do you do your asset allocation?

Related Posts

1. Talking about financial autonomy with my nieces
2. How to reduce your investment risk and increase profits
3. Picking individual stocks is the fastest way to go broke

Connect with me

I would love it if you connect with me via social. You can find me on Facebook, Twitter, LinkedIn,  YouTube, and Instagram.