Canadian investors are too obsessed with U.S. stocks

If past returns were a reliable indicator of future returns, the investor asset mixes I’m seeing these days would make great sense.

One reader talked about having 70 per cent of a portfolio invested in Nasdaq 100 stocks. Another mentioned a portfolio of two mutual funds, a balanced fund with a one-third weighting and a U.S. index fund for the rest.

These portfolios remind me of how investors were loaded to the gunwales with Canadian stocks and funds leading up to the global financial crisis 10 years ago. Resource stocks were on fire back then, and the Canadian market had been a strong global performer. U.S. stocks lagged and you could barely register the level of interest in having U.S. exposure among Canadian investors.

Ten years later, the S&P 500 has turned in annualized total returns of 13.3 per cent in Canadian dollars (period ending July 31), while the S&P/TSX Composite Index averaged 5 per cent. In no way am I predicting that the Canadian market is about to pull ahead of the U.S. market. But it’s clear from long-term stock market history that outperformance is temporary. Keep a strong weighting of U.S. stocks, but don’t get cocky.

The MSCI World Index divides up the world as follows: 62 per cent in the United States, 35 per cent in markets outside North America and 3 per cent Canada. Global investing purists might be happy with a 3-per-cent Canada weighting, but most investors in this country will want a lot more than that. One thought is one-third evenly split between Canada, the United States and international stocks in the equity side of your portfolio. American true believers could take that up to 40 per cent, with another 30 per cent in Canadian and international.

The U.S. market is an awesome diversifier for the Canadian market, which is deficient in technology and health-care stocks. Tech has been a huge performer in recent years, but market leadership tends to change over time. A diversified portfolio will ensure you’re not overly penalized when the market shifts, and that you’re well placed to scoop up gains in whatever markets and sectors take the lead.