Andrew Feindel: Examining the psychology behind home bias may help position a portfolio for success
By Andrew Feindel
All the attention-grabbing headlines out there these days make it more challenging than ever to separate valuable information from irrelevant distractions in order to make informed investment decisions without falling prey to emotional reactions.
This is particularly true with topics such as home bias, where an individual investor’s experiences heavily influence their perceptions, so emotions can cloud their judgment. This can lead to less-than-optimal long-term investment strategies that may impact their chances of achieving their financial goals.
Solving home bias is more complicated than it sounds, but examining the psychology behind it may help position a portfolio for success.
The degree of home bias investors exhibit is frequently influenced by psychological factors instead of logical reasoning.
For example, an investor’s past experiences can significantly shape their risk tolerance and investment choices. If an investor made substantial investments in the Canadian market between 2000 and 2010 — when it outperformed many other market indexes — they would likely have a greater tilt towards home bias.
Conversely, an investor who began investing domestically after 2010, when the Canadian market underperformed, might be hesitant to seize domestic opportunities. Other factors that can reinforce these subconscious biases might include one’s political beliefs, view on foreign governments and/or occupation.
In order to create appropriate investment strategies suitable to each client’s unique circumstances, advisers should strive to understand these biases and help clients consider more pivotal investment variables.
It is crucial to take a step back when determining the right degree of diversification an investor needs, and look at markets from a broader perspective to strategically position a portfolio for different market cycles.
The last bull cycle from 2009 to 2021 was filled with quantitative easing, disinflation, low yields, growth and large-cap stock dominance, globalization and monetary excess. However, the next bull cycle is looking quite different, with quantitative tightening, inflation, normalized yields, onshoring and the resurgence of small-cap and value stocks potentially being the core drivers.
Whereas the last bull cycle did not favour home bias for Canadians, should the key variables of the next bull cycle diverge from those of the previous one, a strong argument could be made for favouring some form of home bias for Canadians.
Given the volatility of macroeconomic and geopolitical factors, it is important to not fixate on a single perspective and stress test portfolios by assigning probabilities to different scenarios.
Personal circumstances are crucial considerations when determining the appropriate degree of diversification, often more so than strategic market factors. Elements such as age, risk tolerance, family situation, income and liabilities need to be considered alongside market factors to ensure a balanced portfolio.
For instance, as individuals approach retirement, they should consider holding more Canadian assets to avoid currency and liquidity risks. Those who need access to their money over the short term should be investing conservatively in havens such as guaranteed investment certificates, high-interest savings accounts or short-term bonds to avoid price risk. And individuals with a higher risk tolerance may want to hold more foreign assets over a longer-term horizon.
Specific allocations will vary depending on a mix of individual and market variables, but it’s generally advisable to avoid holding more than 80 per cent to 90 per cent in either foreign or domestic assets as a balanced approach is often more beneficial.
For example, Horizons Equal Weight Canada Banks Index exchange-traded fund provides exposure to the Big Six while deferring taxable distributions until you sell the ETF, making it tax efficient compared to buying the six banks individually. The Purpose Tactical Asset Allocation ETF is another tax-efficient fund that automatically adjusts asset allocation between equities and bonds to generate absolute returns. For those seeking equity exposure with enhanced yield, the Evolve S&P 500 Enhanced Yield Fund provides exposure to the S&P 500 with an option strategy that provides additional income.
Keep in mind that there are rarely, if ever, times of complete certainty in markets. Every day, new developments throw into question the viability of investment strategies. In this ever-changing environment, an adviser can help clear the fog of financial complexities and shed light on timeless, fundamental investment principles that help you achieve your financial goals.
Andrew Feindel, CFA, CFP, CSWP, CIM, FMA, CPCA, FCSI, HBA, is a portfolio manager and investment adviser for Richie-Feindel Wealth Management at Richardson Wealth Ltd. and the author of Kickstart Your Corporation (2020) and Kickstart: How Successful Canadians Got Started (2008)
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.
The stock is now showing a 16.1% gain for the year after rising the past two days.
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
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