How will the Trans Mountain Pipeline decision affect my investments?
By ATB Financial 7 March 2019 4 min read
When the Federal Court of Appeal recently revoked environmental approval for the Trans Mountain Pipeline expansion, it effectively brought a halt to construction only days after it had begun.
Many Albertan investors are understandably concerned about how this might impact their portfolios. We wanted to address those concerns and explain what the decision could mean for your investments.
Should I be worried?
If your portfolio is Canadian energy-heavy, the decision will affect your portfolio. Some companies, like Suncor, announced that they are putting projects on hold because of the uncertainty it’s brought.
Issues with the pipeline expansion are likely to restrict growth in the sector. Without the expansion, oil sold will continue to fetch lower prices. Alberta oil currently fetches $25 to $30 per barrel less than the widely followed West Texas Intermediate (WTI). The expansion would allow Canada to sell to other markets for much higher prices. Without it, Alberta will see the maintenance of the status quo, rather than any real growth.
However, if your portfolio is appropriately diversified, with less than 10% invested in oil and gas, this decision will have less impact on your investment performance.
What exactly is a diversified portfolio and why is it important?
Diversification is where you spread your investments across different sectors and countries, so as to reduce the risks from any one area. It helps to smooth out your return and have less volatility in your portfolio. That’s why the pipeline decision will have little impact on appropriately diversified portfolios.
While investing in a single sector can bring large, short-term returns when that particular industry is booming, it can also backfire on you.
If your portfolio is heavily concentrated in one sector, for example marijuana, your stocks could fall by as much as 50% rather quickly. Unless something catastrophic happens to markets, your diversified portfolio won’t be down 50%. Even then, investors are more likely to experience volatility rather than a permanent capital loss.
What is home bias and how can it harm my returns?
Home bias is the tendency to invest in your home country’s stocks. It’s like Albertans investing heavily in energy. People invest in names they’re familiar with, versus foreign companies, because they feel they understand them better.
The problem with having a home bias in your investments is that if your country performs poorly, your whole portfolio performs poorly. With home bias there’s nothing else to make up for those losses.
With diverse investments, you can also have US, European and Asian stocks to offset your portfolio when one sector or country underperforms. So far this year, Canada has been fairly flat, with the S&P TSX Composite up almost one percent. The S&P 500 is up about 14% in Canadian dollar terms, so if you’re investing only in Canada, so far this year you wouldn’t have made any money.
What am I missing out on with home bias?
By investing only in Canadian companies, you miss out on some opportunities in industries not present in Canada. For example, the US is very strong for technology, with Apple, Facebook and Google and it also has consumer giants like Walmart and Amazon.
Canada doesn’t have any companies in these industries that can really compete. That’s why it’s important to invest globally.
Do I have too much oil and gas exposure in my portfolio?
If you’re working for an energy company and have invested considerably in their stock, then your portfolio will probably be too heavily concentrated in one sector. It’s similar to an individual working in a bank and owning all bank stocks. Many people invest in the sector they work in, because they’re familiar with it. But when you’re working within it, you can get wrapped up in the emotions of it. In the case of Albertans, your salary, and the value of your home, are also tied to oil prices.
Professional money managers can help investors manage their home bias and prevent them from being overly concentrated within their portfolio. Getting financial advice can also help keep other emotional decisions at bay. Investing one third in Canada, one third in the US and one third internationally ensures a more diversified approach and avoids the risk of overexposure to any single market.
Don’t listen to the noise
Events, like the pipeline expansion decision, can be noise for your investment portfolio. If you’re always reacting to the noise, your investments will suffer. There is always going to be volatility, so it’s important to have a diversified portfolio that can smooth out those volatile events. A diversified portfolio can ride out volatility but listening to the noise can lead to permanent capital loss. If you feel you’re your investments are too energy-focused or have too much of a home bias, contact ATB Wealth and we will help you construct a portfolio that’s right for you.