Rational Advisor

Globally the Canadian index, looks like it could do no wrong. It has been one of the strongest investments aroudn the world.

But historically, we go through these ebbs and flows in which people are investing in Canada, then running away from Canada. Likewise we go through periods when the index is good and then miserable.

In 1993 BCE Inc was the largest stock on the TSX representing 5.74% of the TSX total market capitalization. Royal Bank of Canada came in second at 3.54%, the Seagram Co. Ltd came in third at 3.4% and Barrick Gold Corp was fourth at 2.9%. Fast forward to the fall of 2000. Nortel Networks Corp was 28% of the TSX and Seagram was the next largest at 2.97%

That is amazing that one stock made up 28%, and the seocnd largest was so far back at 2.97%!!, and Seagram and Nortel have virtually disappeared of the index now.

Skip ahead another seven years. These days the TSX is led by either Royal Bank with about 4.5% of the market, followed by Manulife, trailing right behind Research in Motion. These three are flip-flopping on 1st place.

We should be concerned about diversification if we invest in Canada. The TSX’s heavy concentration in the financial sector, at 30% of the index, along with energy at 27% and materials such as mining at 18% means Canadians who stick just to the TSX are missing on many sectors that will become increasingly important especially as the baby boom generation ages.

A simple concept in diversifying your assets comes back to basic economic principles: those things that we deem essential to life will be supplied at a profit by somebody or else the companies disappear and we no longer get access to them.

Think about how you spend your own net income, and invest accordingly. Where do your dollars actually go?

In Canada 45% of the equity market is in natural resources, copper and oil and gas. But 45% of my personal life is not in resources. There is clearly a fundamental mismatch in the Canadian index between what is essential and meaningful to our own lives versus the way the index is composed.

And this is why, I am not a fan of index investing - the hot and cold moments are too much, and it does not reflect reality of our living.

Each time, we have seen a big love fest with the indexes, the indexes have come back and made us regret the love-in

Rational

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