Episode 157: Think You’re Diversified? The Risk Hiding in Your Canadian Portfolio

Listen here on our website:

Or jump to this episode on your favourite platform:

Watch Now!

Are you unknowingly putting your investments or your Canadian portfolio at risk by focusing too narrowly on familiar markets?

Many investors, especially in Canada, believe they’re achieving portfolio diversification simply by owning a range of stocks or index funds. But today’s episode reveals a critical blind spot: geographic concentration. Whether you’re a real estate investor, a business owner, or growing your wealth portfolio, ignoring global diversification could expose you to unnecessary risk — especially in unpredictable markets like today’s.

Listen in to discover:

• Why investing heavily in Canadian or even U.S. markets might leave you dangerously exposed.
• How large pension funds like CPP approach portfolio diversification — and what you can learn from them.
• Practical, simple strategies to achieve true global diversification without overwhelming yourself with research.

Press play now to uncover hidden risks in your portfolio and learn smarter ways to protect and grow your wealth!

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

This episode explores essential topics like diversification, investment strategies, and geographic diversification, while emphasizing risk management and how to avoid home country bias. We dive into tools like ETFs, insights from pension funds, and the risks of overexposure to Canadian equities, compared to broader opportunities in global markets. You’ll also learn strategies for financial planning, wealth creation, asset accumulation, and financial growth, along with principles of wealth management, financial independence, and asset protection. Whether you’re focused on true wealth, corporate finance, or net worth growth, we cover tactics for building passive income, understanding tax implications and capital gains, and optimizing wealth. Business owners will benefit from discussions on compound interest, retirement planning, financial security, time horizon management, wealth building, achieving a higher rate of return, early retirement strategies, financial education, and the principles behind the F.I.R.E. movement.

Transcript:

Kyle Pearce: Well, Canadian wealth secret seekers today we are going to be digging into the topic of diversification. Now we’ve talked about diversification before on the podcast, but today we’re actually going to go beyond just looking at diversifying across say different stocks in a store stock portfolio. Right. We’ve talked about how, you know, instead of investing only in a few select companies, but rather looking at indexes, we’ve also talked about

Diversifying across asset classes, right? As you all know, we were very heavy into real estate and over time we’ve been shifting to try to continue growing our real estate portfolio, but also gain exposure to other asset classes as well. That’s another form of diversification. Well, today in our episode, we’re gonna talk about specifically location, geography, diversifying across different markets.

because you know I’ve been hearing this a lot on other podcasts on blogs folks who are discussing especially I know it sounds like we sometimes pick on the fire movement but we actually love the idea behind the fire movement and getting more people investing more of their money but we just want to make sure that as that pile grows that we aren’t leaving ourselves exposed to undo or unnecessary risk simply because we were following steps blindly.

Jon Orr: Yeah, for sure. And especially at this time, know, time of this recording, you know, you’re you’re looking at, some significant changes in the stock market. If you’re looking at, say, charts right now, things have significantly dropped and they’re comparable to 2008, you know, 2000 and 1987. So we’re seeing significant drops. So when you start to think like that, you know, we see these results, you’re saying like, hmm, could I have avoided this or could I have

of strategize better or how do I strategize for, you know, mitigating a drawdown such as what we’re seeing today or we’re seeing, say, in the last couple of months. So it’s a good time to talk about diversification, Kyle, and like you said, like I think what today we’re going to point out here is identifying some blind spots, identifying some holes maybe in our strategy, and maybe giving you a little secret sauce that maybe you have not yet, say, looked at in the past to help you with, say, that risk management.

Kyle Pearce: I love it. I love it. And you know, just to kind of, you know, add a little bit of context to what you had mentioned about some of the previous drops like 2008, for example, or 2020, really while we haven’t seen the actual massive change from top to bottom yet, as we saw, say in 2008, what we have seen is a lot of, single down days that we have, have only seen during those periods. So we’re still in it.

And you know, the reality is, is there could be more ahead. And while you might be listening to this going like, shoot, the goal here is not for you to bail out on what it is you’ve done. You know, at this point, it’s like, hold on to your hat. But let’s start learning so that we can position ourselves to be better prepared in the future so that if and when those it’s probably not an if, but when those drawdowns happen, that we aren’t necessarily fully exposed as maybe some might have. by following, a very, very hands-off indexing strategy with very few indexes.

Jon Orr: Yeah, and as we talk about, specific examples here today, I want you to kind of think big picture to think zooming out. So if I’m a real estate broker, I’m a business owner, I’m a real estate investor, I’m a, you know, an entrepreneur, I manage and risk every day of my business, I want you to think bigger picture here as well as some of the recommendations we’re going to be talking about, specifically to diversifying in say, your area. So if you’re not, you know, thinking about

choosing anything on the stock market or you’re not thinking about because that’s the example we’re going to look at. But if you’re not saying in that world but you are managing risk in other worlds and your other are diversifying in other worlds in terms of your business or let’s say the work you’re doing on a regular basis, your real estate portfolios, then you know these lessons that we’re talking about here today are going to apply in the bigger picture as well.

Kyle Pearce: Awesome, awesome. And I’m going to throw out a stat that I think might be maybe shocking to some, but maybe not. Maybe you’re a part of this group, and you’re thinking, isn’t this what everyone does? And in a allocation trend report on PWL Capital’s website, they reference a stat that says Canadian investors allocate approximately 52 % of their equity portfolios. We’re not talking about fixed income.

to domestic stocks, despite Canada representing only about 3.4 % of the global equity market. So when you think about that for a second, and you think, OK, I’m Canadian. I’m proud Canadian. And I have no intentions of leaving. And I want to be supportive of our economy. When I look at it from an investment standpoint, and I think to myself, I’m going to take half of all I have.

Right? And some people are above this number, and some people are below this number. But I’m going to take half of my investment bucket, and I’m going to commit it to Canadian equities, despite the fact that Canada only represents under 5%. Like, we’re talking 2 3 %-ish of the global equity market. And you’re basically saying, like, I’m going to go almost all in. Like, I’m half in on that. And I want you to think for a second, like, this is less about it being

you know, on a drawdown. Like I’m not concerned necessarily about the drawdown aspect, but just think about over the long term, how will Canada’s returns on equities compared to other parts of the world, like the US or maybe China or maybe other international markets that have stronger growth numbers than we do here in Canada and represent a greater portion of the world’s global equity market.

So right there, we have to start thinking a little bit and going, OK, while you get huge gold stars, if let’s say you’re not like a five-stock investor, I’ve got like, not picking on any of these companies, but I’ve got Enbridge, I’ve got RBC, or I’ve got Apple, I’ve got Nvidia, the bag seven as our friends at Hedgeye like to call it right now. You’ve got a diverse index, which is great.

But the question is, is where is that index and how is it allocated? And is that a good fit? Is it a good asset mix for you to give you some of the nice returns you’re after, but then also a little less of that downside risk all at once.

Jon Orr: So I think what you’re kind of, and I don’t know, I want to hear your thoughts on this, is that many of our, say, do-it-yourselfers with index funds or managing splits on your portfolio or where certain assets are and you’re trying to balance a portfolio, I think many of us have made, it has made sense to us to say, I’m a Canadian, I want to invest in Canada, I want to go with Canadian dividend stocks maybe, and

I’ve never, you know, I’m going to put all of my money or I’m going to put a good chunk of my portfolio into Canadian equities. Because that’s just what I guess I know. And I think this is the bigger picture of like the blind spot idea is that most of the time it’s like, that’s that’s what we do. We just do what we know. And and also I know about these companies or I know they’re familiar to me. Canada is familiar to me. I’m like, I get Canadian news every day.

I read about, say these companies that I’m investing in or I’m heavily invested in the Canadian economy. So this information is flying at me pretty much every day. And so then when I know more, I can make better decisions. And I think that might be the reasons that we stick with what we know, right? Is because some of the rules of investing is pick stuff you know, pick companies you know, pick economy or…

industries you know about so that you can you can feel good about where your money is residing. And then and then make sure you make make good decisions with those those investment dollars. So like 2 % 2 to 3 % of the global economy, though, makes it go like, I’m I’ve really just put all my eggs in a 2 % basket when 98 % of the world’s economy is out there doing something maybe different, maybe the same, but maybe different, but I’m only exposed to 2 % of the world’s economy.

When we go, you know, a little bit bigger picture, you know, when you think about the US and the US economy, that kind of brings it up to like more of about 50 % of the world’s economy. And I think a lot of us who are, or a lot of people who are, say, do it yourself, you’re choosing, you know, your own investment portfolio balances, you might be including the US in there, but then again, you’re still only exposed to 50%. But I guess the wonder, Kyle, right, is that if I want to be exposed to the other 50 %…

or the other 98 if I’m not in just looking at Canada, is do I have to now know about the Chinese economy and all the Chinese companies that I don’t even, like, is this foreign, actually foreign to me? Or is that like, don’t even, I can’t even, yeah, I know, can’t even think about that. one of those things I think when we think about something that we’ve been missing out on, our first reaction is I don’t have time to like,

Kyle Pearce: Yeah. I see what you did there, by the way.

Jon Orr: to go and learn more about that. I’m okay with like my 2 % exposure. But what we’re trying to do today is just point out a blind spot.

Kyle Pearce: 100%. And you know, the interesting part is like we look at everything in phases, right? And we look, you know, we talk a lot about the flywheel and getting your flywheel going in your business or in your investing and you know, this understanding of investment and wealth building and so forth. This isn’t to make people sort of go like, shoot, I should have been doing that. It’s really an awareness piece. As you mentioned to

Bring up this blind spot not to put you in any sort of panic, because you know what I love? I love when I see people that aren’t investing start investing. And usually that means they start blindly. They start, and by blindly, I hope it’s not into a single stock, or into penny stocks, or anything like that. I would still recommend indexing. And let’s say they did index all in on a Canadian index. As they’re growing this investment bucket, because the bucket isn’t large yet,

It doesn’t have a huge impact, right? A percentage on a small number, absolute value, like the actual number looks not all that bad, right? So for example, my son has about $1,000 of all birthday money and things and you know, and he wanted…

He wanted to do some investing. I’m kind of letting him run the show on it, except I did pull the rug on Bitcoin when I knew that things were not looking so good when it went bearish trend, I just did it. And then he was like, why’d you sell the Bitcoin? I’m like, well, because I think you’re gonna be better off for now if we sit on the sidelines on Bitcoin, right? And you know, it turned out to have worked out in his favor. But the goal was though, is that that thousand dollars, like even if he went all in on Bitcoin and it goes down.

70%, he’s lost $700, a lot in a little kid’s mind, but not a lot in the grand scheme of things, right, when it comes to our family, right, or our net worth, let’s call it, right? But that 70 % is massive on somebody else’s portfolio that has been growing. So as we progress through this world and as we contribute more and as we invest more, at the same time, if we can get our understanding and knowledge flywheel going,

we can make better moves along the way. So it’s less about, you know, getting it right the first time and more about just becoming more and more aware so that we can make better moves. And over time, as we learn more, what’s really interesting is that you’ll see people as their pile grows, they start to appreciate more consistency and less volatility.

over these big swings, right? Whereas when you see people starting their investment journey, what you often see people do is they look at, you know, out the out the rear view mirror, right? In their hindsight, and they go, you know, I wish I didn’t have my money with that guy at the big bank, because he only got me 8 % returns on average, when the SMP did 10 or 11, or whatever that number is. But in reality, it doesn’t really matter at this stage of the game. And if you took the wheel

when that person was helping you, you might’ve been in a much worse place, right? Like maybe you would’ve had more risk on and you would’ve lost some money. So as we expose these blind spots, we start to recognize that, you know, I want to take advantage of upside wherever possible, but boy boy, does it become more and more important to protect our downsides. Because I’m telling you right now,

that emotional side of things is a lot harder to control, even if let’s say you’ve been investing for 20 years and the market goes down by 50%, right? So how do we do things so that we can gain good upside, but spread our risk a little bit. And I think today, when we look at things and we start talking about sectors like Canada’s equity market represents about two or 3 % of the global market, the US about 50%.

And then if you really think about it, the other 55-ish percent is somewhere else. Like, it’s international. And we don’t necessarily have to take on that responsibility as the investor to go understand China or go understand the market in other parts of the world, because there are ETFs that allow us to do that. Some of them are all in, where they’ve got it already mixed. And they’re like, here’s how much Canada, here’s how much US, and here’s how much international.

you might go a little bit more a la carte and say, listen, I like this particular, you know, BMO S and P 500 ETF for my US portion of my portfolio. Maybe you want to go heavier US because you just you’re like, I’m all in on us and I want less in Canada, or vice versa. It’s totally up to you. But the real goal here is making sure that we’re aware of where those funds are and recognizing that just because I have money in an ETF that is tied to

an index, which is way more diversified than just buying single stocks. There is still a massive amount of downside if that particular index experiences a large bump in the road like we’ve seen in many of the indices that we’re seeing here in North America current.

Jon Orr: Right, Kyle, what are people recommending? Like what is Vanguard recommending? What are the pension companies doing? Because it’s like, you know, if this was one of those blind spots, I mean like, well, I have been investing in my portfolios, been heavily, say, Canadian or North American, and I haven’t really been exposed outside of those two, say, economies. You know, what are some of the recommendations out there? Or are people, say, not recommending I’m sure they’re not recommending it, I mean, are there some rules of thumb that might give us a starting point?

Kyle Pearce: Yeah. Well, you know what? I would say this is I think having home field bias or home base bias or whatever home country bias is going to sort of prevailed. So we’re not suggesting that you only invest 2 or 3 in Canada, right? You know home. You understand it. Having a larger amount than, 3 or 4 in Canada, I could certainly understand. But there are some people that are just like, I’m just

I’m not gonna do Canada at all and I’m just gonna do all in the US. Like here’s an example, CPP for example, who is investing on our behalf, right? A lot of people get CPP confused with social security in the United States, right? Where social security is actually funded by taxpayer dollars. Whereas CPP is actually a fund. It’s literally a pension fund and it’s very, very healthy. Well, they’ve got 36%. This is as of 2023.

They had 36 % allocated in the United States, 26 % in Asia. So we’re not going to go down and break it like, how much is China, how much is Thailand, and so forth. 26 % is in Asia, 18 % in Europe, 6 % in Latin America, and only 14 % remained in Canada. Now, when I look at that, I actually, as a Canadian, I sort of go like, interesting. Shouldn’t our own? I’m happy that they’re trying to make sure CPP

is going to be there, you know, and make sure that it’s funded well funded enough so that I can take advantage of it because I’m a contributor. You are as well, John. But at the same time, I’m like, man, wouldn’t it make more sense for us to be putting more of our investment dollars from our own pension fund into back into Canada? And to me, like, that’s a telling sign right there. So while I’m not saying you need that breakdown, what I might argue is that, you know, even our own pension fund

here in Canada is not fully or 50 % invested in Canada. So I think it’s more about when you look at what matters to you and how do you want this to sort of play out. the Quebec pension plan, I think is like 40 % US 25 % Canada, the rest is other places. RBC, I think we had some some recommendations or actually let’s look at

you know, the Canadian couch potato, which was a very popular podcast. I don’t think they record anymore, but they still have a blog. he’s got, you know, 20 % Canadian equities, 40 % us equities and 40 % international equity. So we’re not suggesting that you have to go and be like perfect, you know, and be like, well, Canada’s this percentage of the global, you know, populate or the, the global equity market. We don’t need to do any of that sort of thinking, but

I do think that we need to have an awareness that, hey, if I’m 100 % Canadian equity or I’m 100 % US equity and the US runs into a speed bump like we’re seeing currently that you get to go for the full ride, even though you’re well diversified within the borders of that specific country.

Jon Orr: Yeah, yeah. Like even Vanguard is recommending like 30 % Canadian and 70 % international like equities. it’s, it’s, think when you, you’re talking about, you know, the bump in the road, you know, I think when we are diversified across this and, and, and, and we all know diversification is, is good because it helps mitigate risk. But I think the, secret here today where is, opening up is if we have not yet looked outside, say to the international market.

that is a way for us to make sure that we are more diversified than we are, because the definition of risk is like the unknown unknowns, right? Because the more that we know, the more that we can plan for, which means if we can plan for it, actually we don’t really have risk anymore. But risk is there when we can’t anticipate, we can’t predict what is going to happen. And we know that there are say, unknowns, like

prediction of COVID is like, could we have said that that was going to happen and that drawdown was going to be there is like, that’s one of those like things I’d be like, but if I was diversified across, you know, different ways, I might not have seen, say the drawdown that we did see, like what’s happening right now, you know, there are there are country economies right now not going through what we’re going through, you know, in North America, there are there are some, but there’s not everyone. And so, you know, like our

are you know some of that we’re following from Hedgeye Keith McCullough like he’s he’s got investments in Poland and Poland is is doing okay versus say what’s happened here and and that’s been a you helpful guide for us in mitigating our risk and and we’re trying to just point out where some of the bright spots are and so when you zoom out bigger picture right and and and when we zoom out and go where are and I think I said bright spots but what I meant to say is blind spots is like

is that when we zoom out, it’s like when we’re diversifying in business, when we’re diversifying in our portfolios, we’re diversifying in, say, our stock portfolios or investment portfolios, we want to, say, mitigate that risk, which means we have to identify or be okay with knowing that we can identify every single blind spot that we have. And that’s why they’re called blind spots, is because we don’t know they’re there. And knowing that you…

do have blind spots is an important component of risk mitigation because you want to be able to like say, I know that there are unknown unknowns out there and when they happen, I’m going to be okay because I’ve mitigated that risk. I’ve mitigated the unknown unknowns and I’m trying to protect what we’ve already built.

And again, that’s not just say your stock portfolio. This is bigger picture to think like when I’m making business decisions, how do I plan for, how do I account for the unknown unknowns?

Kyle Pearce: Right, right. And I think too, you know, as you’re saying that in my mind, I’m envisioning, you know, if you look at it, like a stock portfolio itself is nice and easy because it’s contained, you get to see what it’s worth, you know, every day if you want good and bad, right? Sometimes that’s a bad thing. But when I look at that and let’s imagine that you just had like three different ETFs in there, you have a Canadian focused equity, US focused equity and an international focused. And if you made

the decision to go like 40 or sorry, 20 % Canada, you know, let’s say 40 % US and all of a sudden now 40 % international not saying that’s the split you should have. if that’s something that you’re aiming for, you think about the natural rebalancing process that usually happens with an equity and bond portfolio, right equity and fixed income portfolios like when the

proportion goes out of whack. What you do is you sell the one that has too much and then you buy more of the one that has too little. And the reason why rebalancing works like that, if you think of what you get out of rebalancing, just the process in doing so, it’s automatically having you sell high and buy low, right? So it’s like you get to build in. So having a process that you want to sort of stick with allows you to kind of take advantage of things that we know that we’re supposed to do, like

buy high and sell low, you know, or sorry, buy high and sell low. That’s what everybody ends up doing though, right? Which is the, which is the sad reality. Whereas, you know, if you have a process and let’s say it’s a simple rebalancing process and you do it, you could do this as, as often or as little as you want. Some people that’s once a year, some people it’s once a quarter. Some people, don’t want to do it every single month. There’s no right or wrong to this game. As long as you’re growing your understanding of what’s happening.

And then you starting to recognize the patterns that are important, right? Because at the end of the day, I think when everybody starts their investing journey, we’re all in it thinking, Hey, if we could just get that one home run, you know, like everything’s going to be okay. Well, guess what ends up happening, right? We strike out more than, you know, we go swinging for the fences, right? Or we, we continue swinging for the fences and we actually strike out. And you know, when you start to look and recognize these things,

You can do this type of work at the portfolio level in the stock market. But then you have to almost zoom out a little bit as well and like look at all of your assets. And you start looking and saying, hey, if you do have real estate, we’re not saying everyone has to be in real estate like we are. When we look at real estate and we say we have this much equity in these properties based on their values today, like where do we want to go next with our next big investment? Do we want more real estate? Do we want it to be local? Do we want it to be abroad?

Do we want it to be in another asset class? And do we have enough safety there so that no matter what happens, because there is always risk, right? And it’s possible that everything goes down all at the same time, right? If we have a global recession, which can happen as well, that we have enough in our safety bucket so that we’re comfortable and confident to be able to continue doing what we know is right by process.

but sometimes we make poor decisions and do the opposite when things are a little bit scary or a little bit intense. So for today’s call to action, what we’re hoping that you’ll do is kind of take a look at where you are in the journey. If you’re in the beginning of the journey where you’re just like trying to commit more of your weekly or monthly income towards investments, don’t get hung up about diversifying across different borders. That is not a worry right now. It’s all about

getting yourself and getting the money going and getting it into investments and depending on what investments you want to make. As you start to build those investments and you start to go, you know, I would like to like to actually optimize and make these things better. This is where you start looking at. Okay. Am I well diversified enough? What kind of risk am I taking on? And do I even need to take on more risk? Because there’s the other aspect as well as that. Once you’ve gotten closer to your financial freedom number,

Why take on unnecessary risk just because right. And a lot of times our egos can get in the way. So as we work through our podcasts together and as we work through some of these ideas, I just want you to make sure that you’re kind of envisioning where you are along this journey and always note that there are professionals out there that can help you to do this work. Like you don’t have to bear the burden of diversifying your portfolio. If you don’t want to, there is a cost to it.

And you just have to be okay with the fact that maybe you’re working really hard in your business and you just don’t have the time and the energy or the will in order to do some of this work on your own. So it is not a bad thing if you want to find that person, that brokerage, that firm that is going to manage that for you so that you can take some of that risk off of yourself and really hand it off to someone else to do on your behalf.

Jon Orr: Well said, well said. And it’s about making sure that we account that we do have blind spots. And sometimes you just, like you said, like that professional, that person who can guide you can help you identify blind spots you may have missed. And that’s really the big goal here today was to help identify that there is maybe a blind spot in, say, your investment portfolio strategy. Maybe not. Maybe you already accounted for, say, that blind spot that other people have. But that blind spot could exist for you.

And if you do need, a second set of eyes, then reach out to your advisor, reach out to your trusted friend, if you’d like. And you want to, say, reach out to us just to have a look at, say, where your balances could be. We do this for business owners. We do this for entrepreneurs, is help them, say, strategize their business planning, but also, in a way, their

their asset allocations. you can reach out to us over at CanadianWallSecrets.com for access discovery, CanadianWallSecrets.com for access discovery. And we can be chatting about some balance there.

Kyle Pearce: And if you are on the personal side, not incorporated and not a business owner, but you’re kind of feeling like, you know, you you’re zooming out and you’re seeing different assets and different buckets. And you’d like to have a discussion about your allocation and how things are going for you. You can also reach out to us over at that same page, Canadian wealth secrets.com forward slash discovery. And finally, business owners head into our masterclass over at Canadian wealth secrets.com forward slash masterclass.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

OPTIMIZE YOUR FINANCIAL FUTURE