Your success as an investor in 2018 and beyond may depend entirely on how much global exposure you have in your portfolio.
Through the first three-quarters of the year, bonds have been money losers and the Canadian stock market has been weak. Only global markets have performed dynamically.
Let’s say you’re an investor with a 60:40 mix of Canadian stocks and bonds. For the first nine months of the year, the S&P/TSX composite total return index made 1.4 per cent and the FTSE TMX Canada Universe Bond Index lost 0.4 per cent. The asset-weighted benchmark return for the 60:40 portfolio would be just 0.7 per cent.
The MSCI World Index, with roughly a two-thirds U.S. weighting, produced a total return of 8.4 per cent for the year to Sept. 30. In a portfolio of 40 per cent bonds, 20 per cent Canadian stocks and 40 per cent global stocks, your year-to-date benchmark return would be 3.5 per cent before fees. You could have juiced that return by increasing your exposure the U.S. market. In Canadian dollars, the S&P 500 has returned 13.6 per cent for the year through Sept. 30.
The current year is shaping up as a frustrating one for Canadian investors who have most of their assets in domestic stocks and bonds. The risk here is that these investors compound their problems by making counter-productive changes in their portfolios. Three portfolio-changing traps to avoid as your reflect on 2018:
- Paring down your bond holdings: Rising rates are hurting bonds, but they will still be a refuge if there is a stock market correction or a recession.
- Getting radical in paring down your Canadian equity holdings: If you live and plan to retire in Canada, then you’ll want a big chunk of your investments in Canadian-dollar assets; remember as well that if global economic growth pushes resource prices higher Canada will be a big beneficiary.
- Chasing U.S. market returns: I noted in a recent column that investors seem too obsessed with U.S. stocks because of their strong returns in recent years.
A properly diversified portfolio will from time to time produce disappointing years like 2018 is shaping up to be. Blowing up that portfolio is not the answer. Maintain your sensible asset mix and judge results over three to five years, not one.