Tuesday, May 1, 2007

currency risk vs. 'canada risk'

With the great appreciation of the Canadian dollar recently, I'm sure many of us that hold U.S. stocks in a Canadian account have been experiencing some devaluation of our securities. What appears to be a rising stock on paper may look like a red ink blotch on your record keeping. This phenomenon has been occurring within my portfolio in a big way lately. I'm not going to get too concerned with this though.

The reason I'm not concerned is that if I'm going to hold U.S. stocks in a Canadian account, I have no choice in the matter. Avoiding these problems with currency changes is akin to avoiding rainy days, in lieu of sunny ones; it just can't be done. If one is going to live (invest) in this market, one has to know that this part of the game. Just like the weather, it can't be controlled or predicted accurately.

With a long term horizon I believe one can look at this with a 'glass half' full view. Currencies will fluctuate both ways, many times, the longer the investment time horizon. What seems like running on a treadmill now, might feel like jumping onto the moving conveyor with all your bags in toe at the airport, a year from now, when the currency is moving the other way.

When making investment decisions I have often heard people express concern about 'currency risk'. These people then go on to say that they stay away from U.S. equities because of this risk.

For me 'Canada risk' is a far greater risk than currency risk will ever be.

'Canada risk' is concentrating your portfolio too much in this great country of ours. While we live in an amazing country, the sum of the corporations which play here do to even come close to running the gamut of diversification. Trying to find companies in Canada that can expose you in the same way that companies like Johnson and Johnson, UPS, Colgate Palmolive, ADP, and Microsoft can, is a daunting task. What ends up happening is that you run out of investment options, or settle for mediocre value, or worse yet, mediocre performers in specific markets. Canada is such a small economy and so concentrated in financials and resource plays, that being 100% Canadian equities is not something I believe is wise, for proper diversification.

There are great things about Canadian investments, which include the dividend tax credit and not having to pay withholding tax on dividends. There is also a certain familiarity, knowledge, and even 'feeling' that you can garner about companies that operate within this country, that seems to help. Staying properly diversified, while taking advantage of these benefits while you can is key, in my opinion.


FinancialJungle.com said...

I'm in the same boat with my US holdings, although I had held about $12,000 in US margin for several months. Luckily Cdn is strong recently and I did the conversion last night using Interactive Brokers. IB rocks! Actually I was going to convert sooner, but my IB account wasn't setup yet.

With US dollar so cheap, maybe do more shopping down south.

Middle Class Millionaire said...

Moneygardener I think you make some great points and although I have most of my portfolio in CDN securities I agree with you long term on the currency issue, as the US accounts for the majority of our exports so as a country we either have to establish new significant trading partners OR make a conscious effort to decelerate the appreciation of the CDN dollar in relation to the US otherwise the CDN central bank will be forced to when US consumers and businesses can’t afford to buy our good.


moneygardener (AKA investor99) said...

That's why I do not think the Canadian government (BOC), would ever let the CAD$ go to par with the greenback. It would be too devestating to our economy.

Anonymous said...

Due to inattention and unaware of asset allocation, I've been massively overweight in XIU for more than five years now.

The default turned out to be the best inattention I've ever had. How about the dollar at $1.15, we;re going there.