The importance of global diversification

March 17, 2016

True diversification knows no borders.

Diversification is a cornerstone of building an investment portfolio and can help reduce volatility and smooth out the ups and downs of the markets.

While many investors diversify by owning securities from different asset classes (stocks, bonds, cash and cash equivalents), stocks of different sized companies (i.e., small-, medium and large-capitalization), investments across different sectors (like industrials, energy and financials), it’s just as important to diversify your portfolio globally as well.

What is global diversification?

Simply put, global diversification means a percentage of your portfolio is invested in securities that are available from financial markets located outside of Canada.

When you invest in securities that come from places like the U.S., Europe, Australia, Asia and/or emerging markets such as China and India, it means that your portfolio returns are not tied exclusively to the performance of the Canadian – or any one – market.

Here are three key reasons to be diversified globally:

1. Canada is a relatively small market

While Canadians tend to focus their investments on companies based close to home, Canada’s financial markets are very small compared to the rest of the world. In fact, Canadian markets represent less than 5% of the world’s investment opportunities. By investing the majority of your portfolio in Canada, you may be missing out on some of the best investment opportunities available outside our borders.

2. The Canadian financial market is focused in just three sectors

Although Canada’s equity market is made up of 10 sectors, just three – energy, financials and materials – make up the majority of Canadian equities. By investing the lion’s share of your portfolio in Canada, you may be missing out on the advantages of investing in some of today’s fastest-growing sectors – like health care and information technology.

                                              

3. It’s much riskier to be invested only in one geographic region, even a relatively stable one like Canada

Canada’s market includes great companies that we all know and understand. But, given the relatively small number of companies and sectors in the Canadian market, large valuations swings can negatively impact your long-term returns. One example of this is the recent volatility in the energy sector. Individuals who invest primarily in Canada are the most adversely impacted by this price weakness. Global diversification means you benefit from investment in stronger-performing regions, sectors and companies when our own markets are struggling.

How to achieve global diversification

Speaking with your financial advisor is an ideal first step when building a diversified portfolio that reflects your investor profile (meaning your time horizon, risk tolerance and long-term financial goals). Your financial advisor will work with you to build a diversified portfolio that reflects your unique needs and provides you with exposure to the many great investment opportunities available all over the world.

To learn more about the benefits of global diversification, talk to your financial advisor and visit AGF.com/GoGlobal.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances. 

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