Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, on April 25.Brendan McDermid/Reuters
Global investors sold off U.S. stocks at a record pace in the last two months, according to a new survey, and financial planners say that’s a timely reminder for Canadian investors to assess whether their portfolios are too concentrated on equities south of the border.
The April survey of fund managers released by Bank of America Global Research found that participants were a net 36 per cent underweight U.S. equities, meaning investors are holding a smaller percentage of U.S. securities than usual. That’s a drop of 53 percentage points since February – the biggest two-month decline on record.
While many Canadians have considered selling their U.S. stocks, or already have, financial planners caution against making abrupt changes.
It should be “more of a question of whether the investor has too much exposure to U.S. stocks, instead of a knee-jerk reaction,” said Jason Heath, managing director of Objective Financial Partners in Markham, Ont.
“The silver lining of this trade war situation is it makes it easier to argue for international stocks within a portfolio,” Mr. Heath said. “Now’s as good a time as any to reduce your [U.S.] overexposure,” Mr. Heath said.
Many Canadians are more exposed to U.S. markets than they realize, financial planners say. That is in part owing to the success that U.S. stocks have had in recent years compared with equities in the rest of the world.
In 2010, U.S. stocks made up 48 per cent of the MSCI World stock market index. Now, that share has grown to around 72 per cent. As a result, even investors who believe they are globally diversified are still significantly exposed to the U.S. market.
While U.S. equities’ dominance of the global stock market in recent years is clear, it’s not always the outstanding performer.
In the nine years following the dot-com bubble crash of 2000, Canada’s main stock index outperformed the S&P 500 by an average of about 7.5 per cent annually. In the past three months, the S&P 500 has lagged behind both Canadian and European equities.
Canadian investors have been jumping in and out of U.S. stocks since the beginning of the year. In January, they sold $17.6-billion of foreign stocks, $15.6-billion of which were U.S. equities, according to Statistics Canada. A month later, they significantly boosted their U.S. exposure, acquiring $29.8-billion worth of U.S. shares.
Mr. Heath said that if Canadians are interested in moving out of U.S. and into European, or other international stocks, it should be part of a long-term strategy of diversification, instead of flip-flopping in and out of the U.S. market.
“Investors trying to time the markets is a fool’s game,” Mr. Heath said.
Mr. Heath said that there isn’t a one-size-fits-all level of exposure for all clients. But he said a good starting point is to know that about half of global stocks are represented outside of North America.
However, the issue is, when one sector or region is outperforming, like European markets are now, “you’re often too late,” said David Field, a certified financial planner and founder of Papyrus Planning in Oakville, Ont. Recent outperformance in Europe shouldn’t be a reason to chase returns there, but a cue to re-evaluate your strategy, he said.
Retirees are especially at risk for acting on impulse, because of something financial experts call “sequence of returns risk”: If markets fall right after someone retires and they start withdrawing funds, those losses can compound faster than if the same downturn happened later in retirement.
“Once you take the money out of the market, then the market can’t recover for you,” Mr. Field said.
