Our Recommended Broker

Get $50 in free trades.
Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max FAQs
Home
Disclaimer
Learning Topics
Contact Us
FAQ Archive

When it comes to adding foreign content to my portfolio, where do I start?

Start with the foundation

Before adding foreign content to your portfolio, the framework of a sound portfolio should be firmly in place. Think of it as building a house. You start with a financial plan and a solid base, before adding additions to expand your holdings. After the groundwork has been laid, then you add personal preferences and variety to enhance the long-term enjoyment of your property.

The same process is involved in creating a portfolio for long-term stability. The building blocks made up of a mix of assets such as stocks, bonds and cash investments help a portfolio weather volatility over the years. After a mix has been put together, adding foreign content can strengthen a portfolio.

Less than three out of every 10 Canadians say they have foreign content in their non-registered investments, according to a recent survey commissioned by the Toronto Stock Exchange. Yet investors can hold as much as they want in non-Canadian investments. With respect to Registered Retirement Savings Plans (RRSPs), 50 per cent of the 3,500 Canadians surveyed by market research firm Market Probe Canada say they hold no foreign content at all. (The foreign content limit on a registered account is 30 per cent)

And when it comes to Registered Retirement Savings Plans (RRSPs), 50 per cent of the 3,500 Canadians surveyed by market research firm Market Probe Canada say they hold no foreign content at all. (The foreign content limit on a registered account is 30 per cent).

Why add foreign content?

Potential for Growth

Canada represents less than 3 per cent of the world's financial markets. Historically, international markets have out performed Canada over the years.

Diversification

As well, adding foreign content to a portfolio increases diversification among investments through a wider variety of companies and industries. Broader diversification can lower risk and create more opportunities for growth.

What about mutual funds?

Foreign content can be added to both a registered or non-registered account by investing directly in foreign stocks but many investors prefer the convenience and expertise of professionally managed mutual funds.

The foreign content in an RRSP can be increased by adding clone funds (RRSP-eligible foreign securities that mimic regular funds) denominated in Canadian currency. It is important to note that clone funds are more expensive to manage, and therefore more expensive to purchase than regular mutual funds, which may diminish long-term returns.

For the average investor wishing to gain experience in world markets, a good broad-based international or global mutual fund can provide foreign exposure.

What is a good balance of foreign holdings?

It varies. Every individual is different, and like the analogy of building a house, your age, personal preferences, long-term goals, risk tolerance and time horizon, all play a factor in choosing foreign content.

Most financial advisors, based on historical returns, suggest that more than 50 per cent of an investor's holdings be held outside Canada in an unregistered account, and to take advantage of the foreign content limit in an RRSP. To diversify your investments, that 50 per cent could be broken down into approximately 25 to 30 per cent in the United States and the remaining 25 to 30 per cent elsewhere.

Defining Foreign Lands

Essentially, a global fund will shop anywhere in the world, including Canada and the United States. An international fund typically will not invest in Canada or the United States.

Other considerations regarding foreign content

Currency implications

The value of the Canadian dollar affects the value of your account. If the Canadian dollar goes up significantly, your foreign holdings converted into Canadian dollars will lose some of their value.

Tax considerations

If you exceed the foreign content allowance, there is a tax penalty.

Administration

Holding accounts with several institutions can mean it's more difficult to keep track of foreign content. You could consider consolidating your accounts with one financial institution. Wherever you hold accounts, be sure you have an effective method of monitoring your investments.