How much of your investment portfolio should be in Canadian stocks? Experts weigh in #CanadaFinance

Home bias among investors in Canada may be on the decline, according to a recent report from Vanguard Canada, but experts say Canadians are still over-investing at home and not getting the full benefit of portfolio diversification.

The report found that Canadians allocate 50 per cent of their equity exposure to domestic holdings, down from 67 per cent in 2012. However, Canadian stocks make up only around three per cent of the global stock market, meaning an excessive home bias remains.

“If you have an over-allocation, you have more potential for volatility in the portfolio,” Ashish Dewan, portfolio consultant at Vanguard Canada and author of the report, said in an interview with Yahoo Finance Canada.

The Canadian stock market is heavily concentrated in financial services, energy, and materials, and the top 10 holdings in Canada make up close to 40 per cent of the market.

At the same time, he says Canadians are going to be underweight in sectors like technology and healthcare, which can offer “high growth potential.” The U.S. tech sector, for instance, has driven a gain of approximately 40 per cent in the S&P 500 since the beginning of 2023.

“It’s not to say Canada is a bad place to invest, a bad place to live, a bad place economically, or anything like that,” Josh Sheluk, portfolio manager and chief investment officer at Verecan Capital Management, said in an interview with Yahoo Finance Canada.

“But it is a relatively small piece of the overall pie when you look at the global markets.”

The solution, they agree, is greater global diversification. But what’s the right mix of domestic and international stocks in a Canadian portfolio?

Based on 10,000 simulations from its proprietary modelling tool, Vanguard found that allocating 30 per cent to Canadian equities and 70 per cent to international equities was optimal for Canadian investors to “minimize the long-term volatility of their portfolio.”

This holds true for a 100 per cent equity portfolio, as well as the equity component of a balanced 60/40 stock-to-bond portfolio, according to the report.

“Obviously, people like upside volatility — you want higher highs — but it’s those lower lows that you really want to avoid,” Dewan said. “With the diversification benefit, you can basically lower risk in your portfolio without sacrificing too much.”

Sheluk says his firm tends to be in the 20 to 25 per cent range for Canadian equities, though anywhere from five to 30 per cent should be reasonable for most Canadians. He says he wouldn’t have a “strong objection” if someone wanted to get closer to the lower end of the range. But he wouldn’t go much higher, and he certainly wouldn’t avoid Canada altogether.

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