Let’s say you want to invest your savings, and you want to buy some stocks as part of your investment portfolio. Which stocks do you choose?
Traditional wisdom says you should hold more of your own country’s stocks than stocks from a foreign country. That means Canadians should hold more Canadian stocks than U.S. stocks.
Related: Investing In Canada – Resources Are Where It’s At
This makes sense, since investing in another country’s stocks comes with currency risk.
Let’s say that Brazil’s stock market goes down by 5%. Brazilians would suffer a loss of 5%, and end there, but what about Canadian investors?
What if the Brazilian real also went down, as currencies tend to do when their stocks go down. If the real went down by 3%, Canadian investors would suffer losses of 8%.
Indeed, banks and other financial advisors often advise their clients to hold more Canadian stocks than U.S. stocks.
RBC’s more conservative portfolios hold more Canadian stocks than U.S. stocks. TD’s portfolios give equal weight to Canadian stocks and the rest of the world’s, including the U.S.
However with MoneyGeek’s portfolios, from the least risky to the most, we recommend investing significantly more in U.S. stocks than in Canadian stocks.
Here’s why:
While both U.S. and Canadian stocks have returned roughly 9% per year for the past 100 years, U.S. stocks have been less risky than Canadian stocks.
There are two main reasons for this:
1. The safe haven effect
Canadians might have trouble admitting this, but the U.S. is special among all the countries in the world. It’s considered the most powerful nation on earth, not just militarily, but financially as well.
Related: The Three “C’s” Of Canadian Investors
As a result, it’s seen as the safest nation to park your cash when the world becomes bedridden with economic ills. In such times, investors have bought U.S. treasuries in droves.
Purchasing U.S. treasuries require U.S. cash. In troubled times, the demand for U.S. cash surges, lifting the U.S. dollar relative to most other currencies, including the loonie.
During the last financial crisis from September 2008 to February 2009, the U.S. dollar gained 20%. Over the same time, U.S. stocks lost some 43%, while Canadian stocks lost some 41%.
A Canadian investor would have lost 41% on her Canadian stocks, while losing ‘just’ 32% on her U.S. stocks.
Unlike with most other countries, the U.S. currency makes its stocks safer, not riskier.
2. Canada’s Dutch disease
Last year, the very influential OECD released a 128-page report that addressed whether Canada has Dutch disease. The answer: yes.
What is Dutch disease? It doesn’t mean there are too many Dutch people in Canada. It speaks to the phenomenon where a resource rich country becomes too dependent on its resource production to drive its economy.
Related: How Do You Analyze Potential Investments?
Since Canada produces tons of valuable natural resources, like oil and copper, people want to hold Canadian dollars in order to buy these resources. This makes the Canadian dollar expensive relative to that of other countries.
Having an expensive currency makes everything in our country more expensive from other countries’ view.
Wages are more expensive, rent is more expensive, and so forth. This makes our other industries less competitive on the global stage.
These other industries shrink relative to natural resource production until one day we realize all we have left is resource production.
Are U.S. Stocks Safer Than Canadian Stocks?
While Canada still has healthy industries other than natural resource production, the imbalance is evident.
The TSX Composite Index is comprised of 26% ‘Energy’ (oil and natural gas), and 19% ‘Material’ (gold, copper, iron ore, etc).
‘Financials’ (the banks) also comprise 30% of the index, and you can argue that much of our banks’ health is linked to how well those Energy and Material companies perform.
Related: Why You Should Own Bank And Utility Stocks
By contrast, Energy and Materials industries comprise less than 15% of the U.S.’s S&P 500 combined.
There are two reasons why such high concentrations in Energy and Material industries should worry us.
For one, our economy is not very well diversified. A blow to just one of these industries can have a significant impact on our overall economy.
But perhaps more importantly, Energy and Materials are very volatile industries by their own right.
Natural resources like oil and copper are volatile. That is, their prices fluctuate up and down quite violently.
Recall during the financial crisis, oil went from over $140 per barrel to under $40 in just 6 months. That’s a much bigger crash than the one experienced by the stock market.
But to make matters worse, Energy and Material companies are affected even more deeply by the natural resource prices.
Let’s take gold. In April 2013, gold prices had briefly dropped by more than 7%, but gold mining companies were hit much harder than 7%.
Related: 4 Ways To Invest In Gold
For example, let’s say it costs a gold mining company $1,000/ounce to produce gold. Gold prices went down from $1,600/ounce to $1,476/ounce in April.
That means the mining company’s margins went from $600 per ounce to $476 per ounce. That’s a 20% drop in margins, much larger than the 7% drop in gold prices.
All things equal, if a company earns 20% less profit, it should be worth 20% less overall. For many smaller gold mining companies, it costs more than $1,000 per ounce to produce gold, which means their value dropped by even more.
The same can be said about companies that produce copper, iron ore, oil and gas as well as other natural resources.
Final Thoughts
All of this is to say, Canada’s economy stands on much shakier ground than that of our neighbours to the south.
Because of this, and the fact that the United States benefits from its safe haven status, U.S. stocks are actually safer than Canadian stocks. Even for us Canadian investors.
And for that, they deserve a greater share of our portfolios.
Dr. Jin Won Choi is the founder of MoneyGeek, an internet start-up that provides investment plans for Canadian young professionals. Dr. Choi has a Ph.D. in financial mathematics, and he’s worked as an analyst for a top performing fund for 2 years.
Managing your money and making sound financial decisions is difficult. We budget and save and try to invest our money wisely, but sometimes we make choices in our everyday lives that don’t make financial sense.
Related: Why Do We Save?
Here are some of my miscellaneous musings.
Why is it that –
- Single income earners whose spouses raise their children at home qualify for less of a mortgage than two income earners with their children in day care?
When we applied for a mortgage on our first home, the mortgage lender qualified us using only half my salary. Apparently the theory then was that I would leave my employment once we started having children.
Since I was noticeably pregnant at the time it was probably a reasonable expectation, but these days it would be considered incredibly sexist.
But let’s think about this. Mortgages are approved based on current gross income. Realtors love this.
How much are you pre-qualified for?
We’re approved for a mortgage of $400,000 and have $25,000 for a down payment.
Great! Let’s start looking at these houses in the $450,00 – $475,000 range.
And before you can catch your breath, you get sucked in to the excitement of house hunting.
A house purchase is a long-term commitment and you don’t want to end up house poor. It would be advantageous to discuss future expectations and perhaps buy a smaller house and take on a lesser mortgage amount that would be more comfortable in the long run.
Why is it that –
- People moonlight for a for a few extra dollars to make ends meet, and then go out to eat or buy convenience foods because of lack of time?
In many cases a second job – evenings and/or weekends – will not pay a great deal. When you take into account the travel to and from your employment, perhaps special clothing needs, a quick stop for a fast food supper – and increased taxes if you get bumped to the next tax bracket – you may want to rethink the type of employment you moonlight at.
Why is it that –
- Some people will drive across town to save a few bucks on a small purchase?
You see this often with people who will go out of their way to a distant gas station to fill up their vehicles. Grocery shoppers will visit several different stores to take advantage of sale prices from the flyers.
This used to drive me crazy when I stayed with my parents for a few months to help them out. Almost every day we drove all over town to buy one thing at this store, another thing at that store, and yet another item at a different place. Then we’d go home, unload and start all over again!
There’s nothing wrong with comparison shopping and picking up good deals – but make sure the savings are worthwhile, or that you’ll be in the vicinity of the stores in question.
Why is it that –
- People don’t donate money to charity but will buy over-priced merchandise they don’t need because it’s for a good cause?
The worst offenders for this type of sales are schools and children’s activity groups. I realize fundraising is important in order to pay for the various programs, activities and field trips.
Perhaps they feel it builds good character to turn youngsters into little salespeople when in reality it becomes up to their parents to flog the items at their workplace.
I would much rather donate the cash to a worthwhile cause than buy yet another scented candle, Christmas ornament or case of grapefruit.
Why is it that –
- People will order a big iceberg lettuce salad for a diet lunch, then pair it with a double chocolaty frappucino at 500+ calories?
Final thoughts
Everyone wants to save money, or earn a little more – but you need to use good sense (and the right tactics) or you’ll end up wasting time and still not getting any further ahead.
Fees may be just a part of life, but that doesn’t mean you have to simply accept them. Fees can easily be overlooked when it’s just a few bucks, but even small fees can really destroy your budget.
Fortunately, there are ways to get around these unnecessary charges with a little extra effort.
Related: 35 Ways I Save Money
Here are 10 fees you can avoid paying with some careful planning or creativity:
1. Landline telephone
More than two million Canadian households have replaced their landline telephones with cheaper wireless service.
Ditching your landline does come with some risks; 911 emergency services have a harder time identifying your location, monitored alarms and other services require either a landline or added-cost wireless technology, and during periods of unrest or bad weather, call volumes can increase exponentially causing disruptions to cell phone service.
Related: Why I cancelled my landline
But if you’re only receiving telemarketing calls at home, consider dropping your landline service to reduce household expenses.
Skype, Google Voice, and Voice Over IP services can often bring phone service costs down to just a few dollars a month.
2. Cellphone roaming fees
Talk to your mobile carrier about a pre-paid long-distance and roaming package before traveling to the U.S. or elsewhere.
Paying a bit up front could save you hundreds of dollars, and they usually last for 30 days so if you don’t use them on a first trip you have them for the remainder of the month. But beware – data and text roaming may not be covered, and there are other pitfalls to avoid.
Related: How to avoid cell phone roaming charges when travelling to the United States
3. Cancellation fees
Cancelling a cell phone contract or a cable package before the end of the contract (or “service agreement”) can bring fees of several hundred dollars.
Bell and Rogers both charge up to $400 to cancel a cell phone contract early – plus additional fees if you have a data plan. Be aware of the fine print in your service agreement and choose your time to change contracts wisely, or don’t sign a contract in the first place.
Related: How I Saved $300 On My Cable And Internet Bills
4. Prepaid credit cards
Visa, MasterCard and American Express offer prepaid gift cards that can be used just like credit cards at merchants across the country. Unlike regular gift cards, prepaid credit cards come with a host of unnecessary fees.
The BMO Prepaid Travel MasterCard comes with a $6.95 annual fee. After the initial expiry date, a $5 inactivity fee will be charged monthly until the balance reaches zero.
Stick to buying regular store gift cards that come without the fees and expiry dates. If your bank offers Visa Debit technology then you can use your debit card in the exact same way as a credit card, while avoiding the fees that come with prepaid cards.
Related: Top Cash Back Credit Cards In Canada
5. Airline fees
Pack carefully – Air Canada and WestJet charge $20 for checking a 2nd bag, and bags that exceed the maximum weight or size can cost you an additional $50. And book your tickets online to avoid a telephone booking charge.
Related: Redeeming Your Aeroplan Miles
6. Banking fees and ATM fees
Banks and credit unions usually offer accounts that waive monthly fees if you maintain a minimum monthly balance. Online banks like ING Direct and PC Financial offer no-fee banking and don’t require a minimum balance.
Avoid non-bank cash machines in convenience stores, bars and plazas. You’ll be charged $1.50 to $2.50 at the machine and often another levy by your own bank for a total of up to $4.50 a transaction.
Plan ahead, use a smart-phone app to locate your bank’s own closest machine or be aware of other locations.
CIBC customers, for example, can use President’s Choice machines without fees. Credit unions have their own extensive shared ATM network.
Related: Debit Card Fees Are Costing Us Money
7. Coin-counting fees
Rolling loose change is a tiresome chore. Many people use coin-counting kiosks, found in grocery stores and malls, which quickly convert your loose change into paper currency. This convenience comes at a steep price, however, with companies like Coinstar charging a hefty 11.9 percent processing fee.
Skip this fee by rolling your change at home. You can buy coin wrappers at a discount store, or buy a small coin-counting machine for home use.
If you insist on hauling your loose change out of the house, most banks offer free coin counting to their customers. Bank of Montreal Coin Counters are free to use for both BMO and non-BMO customers.
Related: Why More Banks Are Extending Hours, Opening On Weekends
TD added coin counting machines earlier this year. The service is free to TD customers, but non-TD customers will be charged 8 percent!
8. Credit report
You’re allowed to check your credit report to see what information financial institutions are sharing about your credit history.
It’s a good idea to make sure the information is correct before you apply for a loan or mortgage. However, the consumer reporting agencies want you to pay $15 to order your credit report online, despite the fact it’s your right to get it for free.
To avoid paying this fee, request your report to be mailed via Canada Post. Here’s the contact information for Equifax and TransUnion:
Equifax Canada
- Tel: 1-800-465-7166
- Fax: 514-355-8502
TransUnion Canada
- Tel: 1-866-525-0262
- Fax: 905-527-0401
Related: What Does Your Credit Score Really Mean?
9. Mortgage life insurance
If you own a home, chances are you were offered mortgage life insurance on your property. Homeowners should be aware that mortgage insurance is not required and must not be a prerequisite for qualifying for a mortgage.
Term life insurance is much cheaper and offers greater protection than mortgage life insurance offered by your bank. Mortgage insurance is the one financial product which declines in value as you continue to pay.
Related: Understanding Life Insurance
10. Gym sign-up fees
Fitness centres are known for pushing a sign-up fee on unsuspecting new customers. Initiation fees can run up to $129 or more and are pure profit for the fitness centre. This is an unnecessary cost when buying a gym membership.
The fitness market is extremely competitive, so shop around for a gym that will waive the sign-up fee.
Which fees do you try to avoid paying? Alternatively, here are 10 fees that are worth the money.