This time, I thought that I might briefly discuss a couple of issues regarding investment strategy.
A constant theme that I have heard over the years is the advantage of investing outside Canada, especially it seems, in the United States. I wouldn’t say it never makes sense to have investments in other countries and, in fact, it often makes sense to diversify outside Canada, but be careful and make sure you understand the risks.
The important thing, as in all investments, is to be knowledgeable about all the factors that you are dealing with, whether investing in Canada or elsewhere. And when you invest in other countries there are additional considerations.
For example, several years ago an assistant and I were doing a year- end review at a client’s office and my rather shaken assistant came in to see me. Our client, a small business owner, had been accumulating funds for a major planned expansion and his investment advisor had suggested U S securities, usually a rather safe investment. Unfortunately, at the time the client acquired the investment the Canadian dollar was trading in the low seventy cents to the U S dollar and rose thereafter steadily to the mid eighty cents. The relative change in value of the American dollar compared to the Canadian dollar resulted in a loss for our client of almost $60,000.
It was made easier several years ago for Canadians, even in their RRSPs, to invest outside Canada. Not only being knowledgeable about the effect of currency fluctuations, but also, it is necessary to understand the political and economic environment of the country where you are investing. China and Russia or even the European Common Market may provide a lot of opportunities, but individual decisions made by companies in other countries may be based on factors and economic realities different from those of a Canadian company. Undoubtedly, Russian and Chinese companies are affected by decisions made at the political level. Even in the United States, not surprisingly, they have different tax laws that can affect your investment or mean that income such as dividends, capital gains and inherences will be treated differently in Canada, than if they were Canadian investments. In the last couple of years political and economic decisions in Chile and other South American countries have affected investments in mining and oil.
Risk is always present when making any investment and you should decide what a tolerable risk is for you. You can rely on a professional advisor, but I do feel more comfortable when I have a grasp of the level of the risk, even when I have professional advice. Remember, it is you that will be losing the money, not the advisor and that applies even if the shares are held in a mutual fund. A good example of this is Citigroup. It was trading in the $40 range in October of 2007 and by February 2009 was trading around $2.00. Normally considered a reliable investment with good dividends, Citigroup and other banks in the U S suffered huge losses. Some advisors were recommending investing in Citigroup when the stock fell to $25 to $30.
It is a tough world out there and you have to be careful and aware. Take care.
Terry Robert B.A., C.M.A., C.G.A.
Please note that this column deals with details and circumstances in a general way and comments are meant solely as a guide. For your protection, a professional accountant is recommended and should be consulted before making any decisions regarding anything discussed in this column.