One of the important tenets of DIY investing is to make sure your asset allocation is on track and ‘on point’. According to Investopedia, asset allocation is an investment strategy that balances risk and reward by looking at your time frame, your risk tolerance, and your investing goals. Sure, I would have loved to have gotten at 20% return on my portfolio in 2017 by investing everything I had into the S&P500, but alas, I decreased the risk by investing in Canadian, International, and fixed income instead of ‘putting all my eggs in one basket’, so to speak.
Asset allocation is all about moderation and keeping things balanced. However, for many Canadian investors, things are not that balanced and heavily weighted towards Canada. This is called home bias (towards Canada). Home bias is when the investor has a preference for investing in domestic securities rather than investing in foreign securities.
Why Home Bias Towards Canada is Not Ideal
In this Vanguard Canada infographic, you can see why Home Bias is not ideal for the Canadian investor. Home bias for the United States isn’t a big deal because the US is not heavily weighted towards three sectors like it is for Canada.
According to Statistics Times, the US makes up about 25% of the world’s GDP and Canada is about 2.05%.
The Canadian market accounts for 4% of the total global market according to Vanguard and yet many Canadian investors have much more than 4% of Canadian equities in their investment portfolios. Much much more. About 56% more.
In the Vanguard infographic, Canadian investors have about 60% of their portfolio invested in Canadian equities.
Canada is overweighted in certain sectors, namely financials (do you own more than one bank in your investment portfolio? I know I do! I have BMO.TO (Bank of Montreal) and also National Bank (NA.TO)… I have a friend who has huge portions of his portfolio in BMO, TD, Royal Bank, CIBC, BNS, and National Bank! Might as well create his own Canadian bank ETF). In addition to financials and banks, the other two sectors that Canada is overweighted in are energy and materials.
When you have your asset allocation unbalanced, this creates increased volatility. I know that if I had most of my portfolio in Canada my returns wouldn’t have been as great, since the TSX was mainly flat last year.
The Reason for Canadian Home BIas
There are a few reasons why Canadian home bias exists.
One of the reasons is because we like poutine so much. If you haven’t tried poutine you are missing out. It is french fries sprinkled with squeaky cheese curds and drenched in gravy.
Just kidding, well, poutine is great but that’s not the reason for Canadian home bias in terms of portfolio allocation.
One reason for home bias in Canada is mainly due to favourable taxation. There is preferential treatment for dividend income for Canadian companies. Canadian companies issuing dividends are taxed at a favourable rate. When you are taxed so much I suppose you look for ways to get taxed less, one of which is to hold a portfolio that has a lot of Canadian dividends! In fact, US dividends are subject to a 15% withholding tax, though this may be recouped. Another reason is that there is less currency risk when you are holding just Canadian equities and Canadian dollar investments. Currency exchange is another reason for Canadian home bias. When the Canadian to US dollar exchange is not ideal, fewer people convert their Canadian dollars to American dollars and less NYSE listed stocks are purchased. The cost of currency conversion can really add up.
my home bias experience
Back in 2015 my asset allocation in my investment portfolio was heavily favoured towards Canadian equities.
Here’s a snippet of my portfolio asset allocation from 2015.
- Canadian equities 42%
- International equities 16%
- US equities 21%
- REITs 2.5%
- Bonds 18.5%
As much as I love Canada (yes I’m one of those people who has a Canada flag on their backpack when they travel abroad)…as you can see, 42% is really way too much “Oh Canada”! I think it was even more heavily weighted to Canada before 2015, there were times I was over 50% Canada.
Of course, there are companies within my Canadian equities portfolio that have a lot of business outside of Canada- for example SNC Lavain (SNC.TO) is a professional services and project management company that has offices all over the world and has 14% of their business in Asia, 23% in the Middle East and Africa, and 11% in Europe. I still classify this as a Canadian equity just to keep things simple.
It took a few years of regular dollar cost averaging and regularly checking my asset allocation to make sure I’m slowly ‘steering the ship’ in the right direction. I’m not one for selling things off to rebalance as I don’t like to trigger capital gains unnecessarily and would prefer to add on to my portfolio. However, it has finally paid off and my asset allocation is more balanced.
In 2018 my asset allocation for my investment portfolio is as follows.
- Canadian equities 28%
- International equities 23%
- US equities 28%
- REIT 2.5%
- Bonds 18.5%
I have still got some work to do as I’d ideally like to maintain an asset allocation of:
- Canadian equities 25-30%
- International equities 25%
- US equities 25-30%
- REIT 5-10%
- Bonds 15%
Since I have implemented these changes my portfolio growth has improved and I have not suffered from the flaccid non-performing portfolio that I had before when it was heavily weighted in Canada. I still get antsy and lustful, pining for the Canadian dividends and buying more Canadian bank stocks for example, but when I see that I have too much Canada I hold my horses and then look at buying something else outside of Canada to add to my portfolio.
I ‘gently’ rebalance about four times a year and just dollar cost average over time. For example, I stopped buying Canadian index ETFs when I saw that I was heavily weighted in Canada. Then I stopped buying bonds when I saw I was too heavily weighted in bonds for my liking. It’s my ‘slow investing’ approach that seems to work for me and my investing personality.
Nowadays there is financial technology to help you rebalance if you don’t want to be doing the math yourself. Passiv is free for Questrade users for the first year and they run the math for you and tell you exactly how many shares to buy of ETF “A” and how many to buy of ETF “B” to maintain your asset allocation.
Readers, what is your asset allocation?
Do you have Canadian home bias?
How often do you rebalance your portfolio?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
Hello GYM,
My allocation is pretty conservative. I’m pretty risk averse and would prefer to give up upside gains at this point to protect the downside.
Cash 12%
Home Equity 8%
Bonds 35%
US equity 30%
Int’l Equity 15%
Good post and thought process. Asset allocation is sooooo very important. Tom
@Tom- Thanks for sharing your asset allocation. I can see why you are more conservative because you are pretty much FIRE’d and retired right now. I’m impressed you have more cash than home equity, that’s great. You have lots of cash reserves which is great for the next correction. I don’t include my home equity in my investment portfolio otherwise it would be super heavyweight in Canada.
Good post, GYM. This is one of the the most important things you can control when it comes to investing and can make or break someone’s investing returns over the years.
There is a lot of home bias in almost all investors, not just in Canada. Even if you look at regional US investors, the west coast investors are heavier in tech, south is heavier in oil&gas, midwest in industrials and east coast in financials. Its just innate human behavior that is interesting to observe.
Back to Canadian investors, yes we get preferential dividend tax credit, but another important aspect to consider is that being a resource-rich economy, Canada can be a good proxy for EM markets — when EMs do well, the resource sector sees a massive bull market and Canadian companies benefit from that.
Just my $0.02
cheers
R2R
@Roadmap2Retire- Interesting, I wasn’t aware that there was regional bias, even among US investors. I guess we are all influenced by what is around us and what to invest in those businesses. Good point about the emerging markets and us profiting from being resource rich. Guess it won’t’ be so bad to continue to have a depressed CAD dollar for a little while longer.
Very good point, GYM. I guess it could be human nature: we prefer investing in the market of our own home country. In this way, probably we feel better? Or feel safer? I don’t know. I used to invest quite a lot on International (developed countries). Lately I adjusted it to more on US.
@Helen- Thanks for sharing that you used to invest Internationally and now you’re honing in on US businesses, Helen. I think it’s a great idea to invest in the US, US’s GDP is huge compared to other countries.
Hmm I never had a poutine before. Wouldn’t the gravy make the fries soggy? Where’s a poutine place in Seattle…
Our allocation is a bit too heavy in local real estate. It was making me uncomfy because of the supply of builds in the pipeline and rent getting LOWER but taxes going up. We should be 10% less weighted in real estate but we’re still not in total ideal category. I think 25% for me is ideal.
@Lily- yes, the fries can be a bit soggy but it tastes very good with squeaky cheese curd. A quick google search yielded this: https://www.seattlemet.com/articles/2016/12/13/best-seattle-poutines
25% is good, if local real estate is included in allocation, the HCOL cities in Canada like Vancouver would be like 99.9% hahaha.
Hi GYM,
Excellent post GYM, it is easy for Canadians to have a home bias especially with the tax laws. I am constantly checking my allocations and putting more capital or investing in Canadian companies with international exposure. I have a similar % of allocation as you but if you add in my house and business assets I am over weight Canada.
@Steve- Nice, that’s what I do too. Sometimes I get carried away, it’s like shopping.. my thought process sometimes is that I REALLY want to pick up the 4% Canadian dividend yielder, but that would make my allocation wonky. I don’t include my home in this but I would be overweight Canada if included as well.
I think it’s natural to invest your money is your home country’s market. Your familiar with the companies and you would be skeptical about investing in a international company your are not familiar with. About 85% of my portfolio consist in US stocks since I know who these companies are and the type business they are in.
@Kris- Cool, 85% in US stocks, things must have performed really well for you guys last year! The US is powerful and innovative, creative, and a business machine.
Really interesting post GYM! I for sure have a home bias when it comes to investing in Canada and it’s probably something I should correct for. I don’t invest a lot in individual stocks so I do get international exposure via ETF’s and funds but when I do buy a stock it is almost always a Canadian one. The poor exchange rate over the last while has meant currency has played a role but it’s also a comfort thing for me. I tend to know more about Canadian companies than I do international ones.
@Sarah- Thanks Sarah! I have multiple accounts everywhere and I was asset allocated to ‘each’ account but not as a whole. It took a while to check my allocations as a whole portfolio and now that’s what I do. Thanks for sharing your thought processes regarding buying individual companies. I have much more individual companies from Canada in my portfolio as well.
As a Canadian, I probably defy the standard home bias as my portfolio is the following:
* 55% US Equities in USD (it fluctuates based on the CAD/USD conversion)
* 45% CAD Equities
* 0% Bonds
* 0% REITs
In the accumulation years, I have no interest in interest-like assets. I used to have REITs but there is no growth, just interest like monthly payment, and switch to investments with growth following the Chowder Rule and Dividend Growth of 10% over 10 years.
@Dividend Earner- Yes you completely defy the standard home bias! Also zero bonds and REITs- good point to avoid the REIT since it is just going to be taxed on top of your regular accumulating income. I am wary of this as I continue to grow my dividend. The Chowder Rule has me hungry now and craving some clam chowder!
I have half of my portfolio in US and half in CAD $. I mainly invest in closed end funds, ETFs, and some individual US and CND stocks. I am investing more in International and EMs. Canadian market is to narrow in my opinion.
@yilmaz- Thanks for sharing your asset allocation! Seems like no one really has Canadian home bias here, I am preaching to the converted again! 😉
Hey GYM!
Great post you have here! I’m not sure if I have a home bias. When I first invested, I bought mostly US and realized I have a bias towards US (I still do). It took me a few years to shift towards Canadian investments. The only CAD stock I owned was my company’s due to the matching program and I think I’m heavily weighted on that though I already sold some a few years ago.
What drives me nuts is the crappy exchange rate so I can’t buy US companies unless I convert. And even today, I still buy ETFs that follow US indexes except they’re in CAD and traded on the TSX. If there’s a CAD non hedge version, I prefer to go with that. Lol I wish there was a way for us to make money in USD but I’m not sure how taxes would be treated… I just feel so ripped off with our currency!!
Again, great post about Home bias!
@Finsavvypanda- Wow I am definitely preaching to the converted! That’s fantastic that you had mostly US stocks. I believe money earned in USD is converted to CAD come tax time and you pay the tax on that for any earnings in US. Have you tried Norbert Gambit? It saves a bit of money on currency conversion. I am in the same boat as you though I bit the bullet recently and converted some CAD to USD.
I am definitely an investor with a Canada bias, I believe last fall I was sitting at 85% in Cdn equities which is way too much. Earlier this year I purchased 4 US stocks so my 85% should be lower. Over the coming years I will be focusing on lowering this further.
Thanks for the post 🙂
@Matthew- Nice Matthew! Yes, I see you started a position in Realty (O). Did you find that having Canadian at 85% affected your overall portfolio return?