Stuck In The Slow Lane

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The biggest news to come out today wasn’t the fact that Finance Minister Jim Flaherty resigned from his cabinet position, but it was Bank of Canada Governor Stephen Poloz who broke the news that the Canadian economy was facing serious headwinds.  What does this mean to our investment strategy and savings?  Plenty.  Macroeconomics is an important factor when it comes to managing your portfolio.  As the news can attest, even Canada, which weathered the economic crisis better than many countries, is not immune to poor economic conditions.

This is why it is important to practice diversity in your investment portfolio.  Even when the economic prospects are gloomy in Canada, there are other countries that are recovering slowly like the United States and parts of Europe.  Keeping all your money in one place, or one asset is detrimental in helping you achieve growth in your investment portfolio.   Despite what the average Canadian may think, keeping all your money in your home country is actually riskier than spreading it out across world with different investments.

One only has to look at the falling dollar during the first few months of this year to realize that many investors deem Canada to be a poor place to invest.  Had you owned assets in other countries, those investments would actually be performing even better as exchange rate between external countries and the Canadian dollar widen.  If you had owned American investments during the first few months of the year, you would almost already experience a 10% gain due to the falling Canadian currency.  Many Canadians think it’s a bad thing when the dollar falls because imports become more expensive, but if you owned assets outside of Canada, you would be enjoying the benefits of a falling Canadian dollar.

So what are some of the ways to invest outside of Canada?  As an average Canadian investor, we don’t travel the world gathering information about companies and researching the economic outlooks of every country.  That’s why financial institutions created mutual funds and exchange traded funds (ETFs) to allow us to invest in the global market.

For individuals with a small sum of money to invest, low cost mutual funds are the best way to get exposure to the US, European, Asian and emerging markets.  Mutual funds are better because commissions from trading don’t eat into your capital that you are investing with.  Good, low cost index funds make good investments because management costs are kept to a minimum while allowing you to invest in a large array of companies in foreign countries.

Those that have a larger sum of money to invest should look into ETFs.  ETFs generally offer lower management fees, but trading ETFs will incur a commission fee from the broker that you use.  Finding low cost index ETFs shouldn’t be hard as there are many financial institutions that offer these investment instruments.

So what do these mutual funds and ETFs hold?  Almost anything you can think of.  If you spread your investment to different asset classes, like bonds, stocks and real estate, this will help mitigate risk even more.

The world is a big place and your own personal investments shouldn’t revolve only around Canada.  Given the size of the world economy, Canada is but a blip on the radar.  Take advantage of the fact that other places in the world are growing their economies even when Canada’s is stagnant.

If you need help on determining how much you should invest outside of Canada, you should really find yourself a competent financial adviser and develop a strategy that will help you identify how to diversify your investments.   If you’re more into doing it yourself, go check out some model portfolios from Canadian Couch Potato, or perhaps read Millionaire Teacher to see how you can build an investment portfolio from scratch.

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