Author Topic: Canada allocation -- why so much Canadian equity?  (Read 2135 times)

justification

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Canada allocation -- why so much Canadian equity?
« on: May 14, 2017, 07:16:58 PM »
The advice for a passive allocation of equities for Canadians seems to be 30% Canadian/30% US/30% other developed/10% emerging.  I'm just starting out, but this seems odd to me.  Why is so much weight put into Canadian equities?  The tax perks of Canadian dividends doesn't seem like a good enough reason to me.

I'm thinking about scrapping Canadian equities altogether and using a 60% US/30% ex-us developed/10% emerging allocation.  Does anyone else in Canada do something like this, or is there something that I'm missing as far as the benefits of loading up on Canadian equity?

joonifloofeefloo

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Re: Canada allocation -- why so much Canadian equity?
« Reply #1 on: May 14, 2017, 08:37:28 PM »
Hey justification,

I'm in Canada, am a fan of Canadian Couch Potato, and had this question too. I asked CCP about it (somewhere on their site!) and also printed out a bunch of years' return rates as posted on it. I found that in enough years, Canada's stocks rocked it, and made this allocation absolutely the way to go. I've since comfortably run with it. I think what CCP said, essentially, and what I found when reviewing years, is that Canada has sucked a bit recently, but in the "longer short term" (20 years) it's proven the right way to go. Not just tax-wise, but rate of return wise.


human

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Re: Canada allocation -- why so much Canadian equity?
« Reply #3 on: May 15, 2017, 12:41:52 AM »
I don't get it either Canada makes up less than 5% of world markets. I went with 15% VCN and 85% VXC. Last year was a good year for Canadian but I'm not switching every time some part of the world does better than another. I suppose tax efficiency is a reason for the high weighting but I find our economy is to focused on energy and the big banks.
« Last Edit: May 15, 2017, 12:54:54 AM by human »

joonifloofeefloo

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Re: Canada allocation -- why so much Canadian equity?
« Reply #4 on: May 15, 2017, 12:52:53 AM »
...I'm not switching every time some part of the world does better than another.

CCP would praise this! We would definitely not want to shift allocations every time some part of the world does better than another. More about a 40+ year plan, based on reason, and sticking with it.

GreatLaker

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Re: Canada allocation -- why so much Canadian equity?
« Reply #5 on: May 15, 2017, 07:16:15 AM »
Reasons include lower taxes on Cdn dividends in non-registered accounts, less effect from currency fluctuations (especially for investors that depend on income from their portfolio), and some studies have shown that overweighting Canadian equities results in slightly lower portfolio volatility than one that follows pure cap-weighted global asset allocation.

Nobody knows what will be the best portfolio going forward, so the best approach is to pick an asset allocation that works for you and stick with it, rather than try to chase performance.

Here are a couple of papers from Vanguard that discuss it.

https://www.vanguardcanada.ca/documents/home-bias-allocation.pdf

https://www.vanguardcanada.ca/documents/global-equities-tlor.pdf

RichMoose

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Re: Canada allocation -- why so much Canadian equity?
« Reply #6 on: May 15, 2017, 10:44:23 AM »
The advice for a passive allocation of equities for Canadians seems to be 30% Canadian/30% US/30% other developed/10% emerging.  I'm just starting out, but this seems odd to me.  Why is so much weight put into Canadian equities?  The tax perks of Canadian dividends doesn't seem like a good enough reason to me.

I'm thinking about scrapping Canadian equities altogether and using a 60% US/30% ex-us developed/10% emerging allocation.  Does anyone else in Canada do something like this, or is there something that I'm missing as far as the benefits of loading up on Canadian equity?

While 30% may be high, I think it's worthwhile to have at least a somewhat outsized allocation to Canadian stocks. As a portion of equities, 10% on the low side and 30% on the high side is appropriate for most.

You can always start with a low allocation to Canadian stocks and increase that allocation as you invest beyond registered accounts and approach retirement. This helps you realize some of the tax advantages and currency stability when you need to start making withdrawals.

You're 100% right that taxes alone are not a good reason to go with a huge allocation to Canada. Through swap ETFs from Horizons, we have tax efficient options with bonds, U.S. and Euro stocks.

Kaspian

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Re: Canada allocation -- why so much Canadian equity?
« Reply #7 on: May 16, 2017, 12:49:50 PM »
...I'm not switching every time some part of the world does better than another.

CCP would praise this! We would definitely not want to shift allocations every time some part of the world does better than another. More about a 40+ year plan, based on reason, and sticking with it.

This is right.  My 5 year CCP has shown me over and over why diversification and rebalancing actually work.  Every year there's a pause where you think to yourself, "Why am I moving money to this loser?", but it always pans out correctly in the long run.  Canadian will shoot up if/when the cost of oil rises and they start pulling that dirty muck out of the sand again.