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Investment opportunities abound across the world! By investing abroad, you can increase the growth potential of your portfolio and protect it from any slowdown in the Canadian market. This is the major advantage of geographic diversification.
Prosperity of foreign markets
As shown in the chart below, the Canadian economy accounts for only 2% of world GDP (Gross Domestic Product). You therefore need to invest abroad, especially in the United States (31% of world GDP) and Europe (26%), in order to fully benefit from economic growth.
Source: MorningStar 2006.
It is therefore no surprise that large institutional investors, who manage billion-dollar portfolios, are partial to international markets.
A compelling example
International investments help mitigate risks and enhance returns. This can be verified by tracking two portfolios with the following asset allocation:
Portfolio A
50% in bonds (Scotia Capital Universe Index)
50% in Canadian equities (S&P/TSX)
Portfolio B
50% in bonds (Scotia Capital Universe Index)
25% in Canadian equities (S&P/TSX)
10% in U.S. equities (S&P 500)
15% in international equities (MSCI EAFE)
Based on historical market data for the period from 1958 to 2002, we note that Portfolio B, which is sufficiently diversified geographically, records a higher return at lower risk!
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Average annual return
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Standard deviation
(% of variations)
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Portfolio A
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9.23%
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10.64%
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Portfolio B
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9.72%
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10.11%
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Difference
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+ 0.49%
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- 0.53%
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This difference in returns of 0.49% could seem to be unimportant at first but it has a significant impact on the long term:
 | With a return of 9.23%, a $250 investment per month in Portfolio A is only worth $480,217 after 30 years.
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| The same amount invested in Portfolio B, which has a return of 9.72%, is worth $532,457 after 30 years, that is, $52,240 more!
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What tools should you choose?
Under current tax regulations, you can hold up to 30% of your RRSP in foreign investments. Are you doing so?
The simplest way to invest abroad is through mutual funds. You can invest in specialized funds that focus on different countries or in global equity funds where portfolio managers decide on asset allocation by continent and country. Such portfolios often consist of well-known multinationals that have earned the trust of consumers across the world.
Request information on Desjardins Funds with foreign content.
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