As Canadians adjust everyday spending and travel to support Canada in the Trump tariff war, it begs the question of whether you should apply similar logic to your investment portfolio and invest more in Canadian stocks.
Certainly, the Canadian stock market is a great place to invest, so buying Canadian stocks can make good sense in the right circumstances. Do it for hard-headed financial reasons, not patriotism.
And realize it’s still important for your financial well-being to maintain a globally diversified portfolio that includes lots of foreign stocks and fixed income. So don’t push Canadian equity content too far.
As a general guideline, investing roughly one-quarter to one-third of your total stock portfolio in Canadian equities makes sense for many average investors, based on research and common practice among investment professionals.
However, the precise optimal equity allocation can vary based on individual circumstances. Retirees looking for investment income in Canadian dollars to fund spending needs in Canada is an example where a greater proportion of Canadian stocks may be justified.
The case for Canadian stocks
The Canadian stock market offers plenty of attractive stocks with strong investment fundamentals.
“Canada has been a very good place to invest for us,” says Peter Letko, partner and co-founder of Letko Brosseau and Associates, a Canadian-based investment firm that invests globally. “There are many world-class businesses at attractive valuations.”
Canada has strong democratic political institutions, a solid legal system, an educated and growing population, as well as lots of arable land and resources, he says.
“It’s a country that really has everything, which is important to investing,” he says. Letko and fellow firm co-founder Daniel Brosseau have been leaders in an investment industry campaign to get the largest Canadian pension funds to invest more in Canada.
There are lots of attractive Canadian businesses across many sectors including banking, insurance, pipelines, telecoms, utilities, retailers and resources, says Letko.
Generally, based on historical returns over a long period, Canadian stocks have held their own globally. While precise comparisons vary depending on time period, Vanguard Canada research from 2024 found that returns for the MSCI Canada Index slightly outperformed the MSCI World Index from 1989 to April 30, 2024. Canadian stocks earned an annualized 8.1 per cent return compared to 7.4 per cent for the global index.
The need for diversification
While Canadian stocks can be a great investment, it’s important to understand the importance of not just investing in Canadian stocks.
You should diversify your overall portfolio between fixed income and equities based on your objectives, risk tolerance, time horizon and other individual factors. Combining 60 per cent stocks and 40 per cent fixed income is a classic asset mix, but the right mix for you should vary based on your individual situation.
Within the overall portfolio, stocks should be diversified by sectors and geography.
Diversifying stocks in this way helps you smooth out the ups and downs of individual portfolio components and helps ensure you’re not too heavily impacted by a particularly severe downturn in a few stocks, sectors or countries. Thus diversification reduces risk through reducing portfolio volatility.
While Canadian stocks are strong in many sectors, they are under-represented in key areas like technology and pharmaceuticals. Their performance is also closely tied to the Canadian economy and currency.
Letko Brosseau makes a point of adding foreign stocks to global portfolios for sectors under-represented in Canadian markets and to get exposure to other economies. “We try to complement what we have in Canada with interesting ideas outside of Canada,” says Letko.
The right amount of “home bias”
Canadians are often told they invest too much in Canada, which is considered “home bias.”
While that’s fair criticism in many cases, it should be recognized that Canadian investors can also go too far the other way and invest too little in Canada.
One common argument for minuscule Canadian investments goes like this: Canadian stocks are roughly three per cent of world stock market capitalization, so you should only invest three per cent of your equity portfolio in Canadian stocks.
But it turns out there is lots of evidence that — within reason — a certain amount of home bias is smart.
Research by Vanguard Canada found that a combination of about 30 per cent Canadian stocks and 70 per cent foreign stocks generally provides the optimal equity mix, based on a 2024 study by senior investment strategist Ashish Dewan. Dewan found that particular asset mix minimized the volatility of the overall equity portfolio.
As might be expected, if you invest more than that in Canada and less internationally, then volatility increases. But perhaps surprisingly, if you load up on foreign stocks much beyond 70 per cent while reducing Canadian exposure accordingly, volatility also shoots up.
That asset-mix guideline is implicitly endorsed by practical investment choices made by many passive and active global investment managers based in Canada.
Passive all-in-one global equity ETFs from BMO Global Asset Management (ZEQT), iShares (XEQT) and Vanguard Canada (VEQT) each include a Canadian exposure that ranges from 25 to 30 per cent, according to recent figures on their corporate websites.
Letko Brosseau adopts a similar Canadian exposure in its active global equity portfolios. While specific allocations vary according to individual client circumstances, a 30 per cent Canadian allocation in a global equity portfolio is fairly common, says Letko.
Tailored to your situation
While Canadian equity content of roughly one-quarter to one-third is a good general guideline, the optimal choice can vary based on individual situations. “There are certain cases where you could overweight Canadian equities,” says Dewan.
One group that might benefit from a higher Canadian stock allocation are retired Canadians who depend on stocks to generate income in Canadian dollars to cover their retirement living costs in Canada.
“We have Canadian customers with long-term obligations in Canadian dollars,” says Letko. “So they often have a desire to be matched.”
The case for higher Canadian equity weightings is further enhanced for dividend stocks in a non-registered account, since Canadian dividends enjoy the Canadian tax advantage of the dividend tax credit.
