Here's how much of your portfolio should be in U.S. stocks
Historically speaking, the U.S. market has often outperformed Canadian equities
Canadian equities fared better than American stocks in 2022 but that doesn't mean investors shouldn't have a portion of their portfolio allocated to the U.S., money managers say.
Determining how much of a portfolio should be skewed towards the U.S. is going to be different for every investor, but for a balanced portfolio made up of 65 per cent equities and 35 per cent fixed income, IG Wealth Management's chief investment strategist Philip Petursson figures a target weight of 23 per cent is a good starting point.
There's roughly an eight per cent swing in either direction of that target depending on the short- and long-term investment opportunity, Petursson says, putting the potential U.S. weighting between 15 and 31 per cent.
"Historically, the optimal level for U.S. equities over a 10-year period has had a very wide range. In some periods, investors would have been better off if their entire equity allocation was to the U.S., and at other times, the optimal weight over a 10-year period was 0%. We wouldn't recommend such a wide range as it would create too much room for error," he told Yahoo Finance Canada.
Younger investors, however, might be able to further increase that allocation, according to Kalee Boisvert, a Calgary-based financial advisor with Raymond James.
"While everyone's investment strategy will depend on their individual goals, risk tolerance, and time horizon, it may make sense for young investors to allocate 40% or more of their portfolio to U.S. equities for their long-term goals," she said.
A common investing mistake is home bias, where an investor prefers domestic stocks over foreign equities, leading to poor geographic diversification. Home bias can occur for a variety of reasons, including familiarity with home country companies and the economy, accessibility and foreign exchange risks.
"Investing in the U.S. market provides exposure to a broader range of companies, particularly in the technology and healthcare sectors. By diversifying your portfolio with U.S. equities, you can take advantage of historical outperformance and increase your investment options," Boisvert said.
Currency concerns
For investors who are concerned about the foreign exchange aspect, the good news is some U.S. companies offer Canadian dollar-hedged versions of their stocks, known as Canadian Depository Receipts (CDRs), and many investment firms offer Canadian dollar-hedged mutual funds or exchange-traded funds.
The alternative could require some more legwork.
"If you do decide to invest in individual U.S. stocks, keep in mind that you'll be trading in U.S. dollars. To avoid losing money on currency conversions, be sure to use a U.S. currency account for any trades into other U.S. holdings. Many investment firms offer U.S. currency RRSP and TFSA accounts to assist with this," Boisvert said.
Last year offers a case in point when thinking about the currency impact, says Kurt Reiman, senior strategist for North America at BlackRock.
"The U.S. equity market lost more than Canada, but exposure to the stronger greenback offered some ballast. Now with equity markets rising in 2023, the U.S. dollar is weakening and weighing on returns," he said.
"Ultimately, this example illustrates how Canadian investors in U.S. stocks experience less volatility in unhedged currency exposures than when the currency is hedged."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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