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Is it time to change your Canadian Equity Weighting?

By ATB Financial 29 October 2018 2 min read

Is it time to change your Canadian Equity Weighting?

Amazon’s share price rose from only $1.50 in May 1997 to over $1,500 by March 2018; one thousand dollars invested then would be worth over a million dollars now. While the stock’s price appreciation was clearly very impressive, over the same period there were 3 separate sub-periods in which the stock lost over 50% of its value, and a fourth - the early 2000’s tech/telecom meltdown - in which it lost about 94% of its value.

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Only with hindsight do we know that Amazon became a successful business and very successful investment. It’s safe to say that many investors lost confidence, “jumped ship” and sold their Amazon holdings over the years as they fell in value, not realizing the ultimate bounty to be realized had they done just the opposite.

 

The same thought process applies to investing in different geographical or economic sectors: the most recent past figures influence most prominently in our minds, and we tend to project it forward indefinitely.

For example, it’s natural right now to want to increase the allocation to US stocks, because their returns have been more than twice as high as Canadian stock returns so far this decade. Similarly, by the end of the 1990’s, after US stock returns were double those of Canadian stocks for a whole decade, many investors would have been inclined to reallocate towards US stocks. Those who did so were just in time for American stocks to lose 4% per year over the next ten years, during which time the Canadian stock market was the only one with positive returns!

Compound Annual Return (CAD) 


Much of the performance difference between Canadian and global stocks can be explained by commodity price movements. Due to its prominent weight of energy and commodity companies, the Canadian stock market tends to outperform when commodity prices such as oil and gold are rising, and underperforms when those commodity prices are flat or falling.

Knowing this relationship simplifies matters only slightly, because it still requires an investor to predict the timing of commodity prices.

For example, few investors in the early 1970’s predicted that oil and gold prices would each rise by a factor of ten before the decade was over. After that experience, few predicted that those prices would languish and even decline over the next two decades. Then in early 1999, few expected that oil - $12 per barrel at the time - would hit nearly $150 per barrel by June 2008. Finally, in late 2014, when oil prices had been in the $80-100 range for nearly five years, few predicted the downward spiral which took them to only $32 by January 2016.

Stock performance & commodity prices compound annual return / Price Chg (Stocks/Commods) Stocks $Cdn, Commods USD


In each of these instances, projecting the recent past into the future proved pointless, even though the “pattern” of the past had prevailed for many years. In short, hindsight is always 20/20 but foresight is inevitably very clouded. Because it’s almost impossible to guess which individual geographic sector, economic sector or individual stock is going to be the next market darling - or bumpkin - it’s crucial to diversify your investments and not put all your eggs in one basket.‚Äč

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