International Investing - Investing for Diversification

Written by The Dividend Guy on March 18, 2006

There was an article in one of our national papers today by an author that calls himself the “Gen X Investor”. His focus seems to be on those investors with a 25 - 30 years time horizon. His article was focused on investing outside of your home country to help you with diversification.

I think this is a good idea from both an investment perspective as well from the perspective that an individual relies heavily on the country they live in - they have their home, their primary form of income comes from your home country, and even the government pension plan is funded by the country you live in.

From a purely academic perspective, I like the way that 1mill_by_35 has explained it. It comes down to the correlation coefficient:

Because of the imperfect correlation (for you stat people, the correlation coefficient for the sample period between the SPDRs and EEM was 0.68 and between SPDRs and EFA was 0.76), one ETF may be down but another may be up. By adding uncorrelated assets, risk factors can be reduced. It’s too much to go into here, but that is the accepted theory. The moral of the story is you get a better risk-reward trade-off by adding relatively uncorrelated asset classes to your portfolio.

In other words, international markets may not move up when the U.S. or Canada does, and visa versa. Having other countries represented in your portfolio may help balance out the drastic ups and downs you may have if you are just in one or two markets.

I have foreign investments in my portfolio - foreign for me means both the U.S. as well as more globally. For example, I hold about 26% of my portfolio in U.S. based investments. I also hold another 19% in other international investments - 45% of my portfolio is outside of Canada. I would like to see this number go up a bit more in the future.


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5 Comments so far

  1. empty spaces March 20, 2006 1:35 am

    check out everbank.com

    they have an icelandic bond that pays 8% and a 3 month CD that invests in CDN, AUS and NZ dollar and offers 4.x%.

    of course, if you’re money is already in CDN, you might want to look at something else!

  2. Investing Intelligently March 20, 2006 4:53 pm

    How about this argument:

    “…we buy equity to earn the best possible ‘real return’ above the rate of Canadian inflation – and domestic equities are the likeliest asset type to do that consistently – hence their representation in a typical Canadian’s mix of assets.”

    That comes from my advisor. Of course it’s only one of his reasons. Diversification and other things come into play. It makes more sense to me compared to fuzzy arguments like, as you say, “they have their home their (sic), their primary form of income comes from your home country, and even the government pension plan is funded by the country you live in”.

  3. The Dividend Guy March 20, 2006 8:11 pm

    Hi Investing Intelligently,

    I am not sure what you mean - do you agree that a person should be internationally diversified or should they not be?

  4. Investing Intelligently March 21, 2006 3:18 am

    They should definitely be diversified internationally. It would be a huge mistake to be 100% invested in any one country. But there are other factors tugging in the other direction, towards having a higher domestic concentration in one’s portfolio, such as the one mentioned by my advisor.

  5. empty spaces November 3, 2006 4:14 am

    i totally agree. and now i think we’re going to see significant devaluation in the dollar.
    I’ve invested in AUD, japanese reits, argentinian reits, oil and gas, canadian trusts, chinese companies and coins!

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