Are you a worldly investor?
Most investors understand the importance of building a diversified portfolio - one that includes stocks for growth potential, bonds for stable returns, and cash for security. But that's just the first step.
Having some exposure to global markets can help to reduce risk and increase potential returns - two of the main reasons for diversifying an investment portfolio.
You can invest up to 30% of the book value of your registered Retirement Savings Plan (RSP) in foreign investments. To find out more about why you should consider maximizing your foreign content, click through the links below.
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Size matters |
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South of the border |
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Currencies fluctuate |
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Going global |
Size matters
Holding investments in just one small corner of the world means that your portfolio is tied to that market's performance. When the trend is up - as it has been in Canada over the past year or so - that's great. But, as history has shown, market leadership tends to change from one year to the next.
The most effective way to protect against declines in Canada's market is to diversify into other geographic areas. After all, Canada represents just a small portion of the world's investment opportunities - most estimates put the number between 2% and 3%.
Some of the world's largest and fastest-growing companies are based outside our borders. In addition, certain sectors have their largest centres outside Canada - high-tech in the U.S., consumer products in Europe, and electronics in Asia.
South of the border
Many Canadian investors diversify their portfolios with U.S. stocks and U.S.-based mutual funds. While U.S. exposure certainly has merit, it is important to remember that the U.S. and Canadian markets are highly correlated. In other words, they often move in the same direction at the same time.
For truly effective diversification, consider investments in markets that aren't highly correlated with Canada's. Markets outside North America - in Europe, Asia, and Japan, for example - are less correlated with U.S. stocks than are Canadian stocks. This can help to reduce the overall risk in your portfolio.
Currencies fluctuate
As the past year has shown, fluctuating currencies are another reason to look beyond the U.S. for diversification. The loonie has been soaring, relative to the U.S. dollar. So, even though U.S. markets performed well in 2003, some of those gains were eaten away when converted back into Canadian dollars.
By holding investments based on a variety of currencies, you reduce the negative impact that a decline in any one currency can have on your portfolio.
Going global
So diversifying your portfolio internationally looks like a sound strategy. But how do you actually go global?
The fund route. For most investors, the easiest and most convenient way to add some international flavour is with professionally managed mutual funds. The Canadian market offers hundreds of mutual funds that invest outside of Canada. Global mutual funds can provide your portfolio with foreign exposure, growth potential, and the diversification appropriate for conservative and more aggressive investors.
Do it yourself. Many companies that are listed on Canadian or U.S. exchanges have sizeable interests outside of North America. You'll need to do some research into the company's activities to find out how much foreign activity is involved and where it's located.
Self-directed investors can purchase foreign shares directly from foreign exchanges. With U.S. shares, the process is straightforward and the shares can be held in a Canadian account. For exchanges in other countries, however, you may need to open an account with a foreign brokerage. Bear in mind that getting information on foreign companies and dealing with foreign trading rules and regulations can be cumbersome and expensive.
An easier way to purchase foreign shares is to buy companies that are available as American Depositary Receipts. These are shares of non-North American companies that are held on deposit in the U.S. and trade on a U.S. exchange in U.S. dollars.
Exchange-traded funds (ETFs) are another way for self-directed investors to add global diversification. ETFs are index-based investments that offer exposure to a basket of stocks from a number of regions around the world.
Speak to your financial advisor or your broker about strategies to enhance the global reach of your portfolio.
Scotiabank has a variety of tools to help you maximize your foreign content. Our Scotia Investment Selector® tool is a good way to determine the mix of investments that suit your risk tolerance and personal situation.
Is your identity protected?
Identity theft sounds like a sci-fi terror, but in fact it is becoming more and more common. In the United States, 161,819 cases of identity theft were reported in 2002, according to the Federal Trade Commission. In Canada, PhoneBusters - a national call centre operated by law enforcement agencies - says that 7,400 cases were reported in 2002.
What is identity theft?
Identity theft is the unauthorized collection and use of your personal information - name, address, credit card number, Social Insurance Number - for criminal purposes. Armed with this information, identity thieves can take over your financial affairs, open new bank accounts, transfer bank balances, apply for loans and credit cards, and make unauthorized purchases. This can have devastating financial consequences and damage your credit rating.
How you can help prevent it
The proliferation of computers and electronic communications is one area where criminals can get access to your personal information. For some practical tips on how to protect your online activities, link to last month's article, Your online safety checkup. The following steps can also help to protect your identity.
Always be wary. Don't reveal personal information, such as a credit card number, to telemarketers - however appealing the pitch.
Guard your mail. Deposit outgoing mail in post office collection boxes or at your local post office. Promptly remove mail from your home mailbox. If you are going out of town, have someone collect it for you while you are away. If you are moving, arrange to change your address well ahead of time.
Move lightly about the world. Try not to carry too much personal information with you. If your I.D. or credit cards are lost or stolen, notify the police and your credit card company immediately. And don't, under any circumstance, carry your SIN card with you.
Shred personal information. An identity thief will not hesitate to rifle through your garbage or recycling bins. Be sure to tear or shred receipts, copies of credit applications, insurance forms, physician statements, and credit offers you get in the mail.
Any letters or documents that contain personal information or your address should be cut up or shredded before they are recycled. Investing in a small document shredder is not a bad idea.
Keep your receipts. When you use a bank machine or pay by debit, don't leave your receipts behind.
Use your body. Always shield the keypad when using bank machines or Point of Sale terminals to reduce the risk of someone "shoulder surfing" your PIN numbers.
Hold onto your credit cards. Lend your books or DVDs, not your credit cards. Sign a new credit card as soon as you receive it.
Chat anonymously. Never provide your real name or address in a chat room (it's also more fun this way), and never give out personal passwords to your Internet service provider.
Review your accounts. Carefully review your bank statements, credit card statements, utility bills, cellular telephone bills, etc., for unauthorized charges as soon as you receive them. If you suspect unauthorized use, contact the customer service and fraud departments immediately.
Make a list. Keep a list of all your credit cards and bank accounts along with their account numbers, expiration dates, and credit limits, as well as the telephone numbers of customer service and fraud departments. Store this list in a safe place.
Consumer protection resources
Here are some good sites for more information.
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