I think we can all agree that having at least a portion of your portfolio in non-Canadian stocks is a good thing.
We’ve heard all the cliches before. Canada is only 3% of the world market. Our economy is too dependent on energy and basic materials to be a good investment choice. We have a massive real estate bubble. Canada’s tech and health sectors are worse than a botched plastic surgery. And so on. These arguments make sense so we diversify outside of Canada.
Even YOUR BOY Nelly has made some recent share purchases outside of Canada. I bought a Mexican airport operator I’m too lazy to look up the proper name of. I also bought Starbucks and Apple and still own some Berkshire Hathaway from a few years ago. Philip Morris was added to the portfolio because I want children to destroy their lungs. And I bought Facebook during the recent market carnage. SPY AWAY ZUCKERBERG AS LONG AS I GET ME SOME PROFITS.
But my U.S. portfolio is just a small percentage versus the Canadian assets. While I’d love to pick up more investments in the states, I’m holding off doing so until something happens.
I’ll buy U.S. stocks in a big way… eventually
The problem as a Canadian buying U.S. stocks has traditionally been the currency.
Blog genies can we throw up a long-term chart of the Canadian Dollar versus the U.S. buck?
The Canadian Dollar hasn’t spent much time under US$0.80 over the last 15 years. It’s mostly been a recent phenomenon.
This is happening today for a couple of reasons. Our Dollar is viewed as being tied to commodity prices. Oil, gold, and other commodities aren’t exactly getting investors hot and heavy right now. And it’s being attacked on the other side, too. The U.S. Dollar has been quite strong over the last few years.
Say I buy $10,000 worth of a stock today and then the Canadian Dollar rallies to US$0.95. How did my investment do?
- $10,000 Canadian is worth US$7,500 today
- I buy US$7,500 worth of stock.
- Stock stays the same but the currency rallies to US$0.95
- The stock is now worth $7,875 in my local currency
See how a big move in the currency can be a real wealth killer?
A better time to buy
It works in the opposite way buying U.S. stocks when the Canadian Dollar is at a high. You get more shares for your buck and you benefit when the local currency heads lower. That’s a fantastic way to juice your returns.
Another example? Don’t mind if I do. We’ll do the opposite as above, buying at US$0.95 and selling at US$0.75.
- $10,000 is worth US$9,500 today
- I buy US$9,500 worth of stock
- Stock stays the same but CAD weakens to US$0.75
- The stock is now worth $12,635 in local currency
Thus, the strategy is simple. Wait and buy U.S. stocks in a big way when the Canadian Dollar approaches par with its U.S. counterpart. You can then sell them when the two currencies move apart or choose to hold them over the long-term.
Many of you won’t like this strategy, saying I have no way to predict where exchange rates will go. And you’re right! I have no idea where the Canadian Dollar will trade next week, next month, or even five years from now. But remember, I don’t need to get a trade right to profit from this. I just need to use historical info to make sure I’m not blowing my brains out.
Others might not care because they want a permanent USD portion of their portfolio. There’s nothing wrong with that. But instead of converting that cash in the first place now, wait until you get a better price for it.
And remember, Norbert’s Gambit allows you to convert your cash without paying pesky 2.5% conversion fees. Those conversion fees are a bigger rip-off than that fancy reverse osmosis water. There are perfectly good puddles out there, thank you very much.
Wrappin’ it up
I only have something like 10% of my portfolio in U.S. names today. It’ll stay at that level until the Canadian Dollar rallies in a big way. I’m perfectly content to wait for years until this happens.
A little patience often goes a long way when investing, and this is yet another example. The Loonie might languish for years below US$0.80. That’s fine. Pounce when it approaches par again. That’s what I plan to do.