Patriotism not always the best move when it comes to your investments

As the trade war between Canada and the United States drags on, many Canadian investors are understandably uneasy about their exposure to U.S. markets.

Some have already begun shifting their portfolios away from U.S. stocks, opting instead for what feels like a safer, more patriotic move—investing in Canadian companies. But while this instinct may feel right, it could be doing long-term damage to their financial futures.

The persistent problem of home bias

Home bias, the tendency for investors to favour domestic assets, has long been a challenge for Canadians. In fact, the average Canadian investor held a disproportionately high percentage of Canadian equities in their portfolios before the trade war, often at the expense of global diversification. According to various studies and industry data, it's not uncommon for Canadian portfolios to have 50 per cent or more allocated to domestic equities, even though Canadian stocks represent only about three per cent of the global equity market.

This home bias has already had consequences. Over the past decade, the S&P 500, an index tracking 500 of the largest publicly traded companies in the U.S., has returned approximately 12 per cent annually (as of the end of 2024). Compare that to the S&P/TSX Composite Index, Canada’s benchmark, which has delivered closer to five per cent annually over the same period. That performance gap may not seem enormous in a single year, but compounded over a decade or more, it can significantly erode an investor’s retirement nest egg.

The hidden concentration risk

What makes the situation even more problematic is that Canadians are not just heavily invested in Canadian equities. Many also hold substantial business and real estate assets, whether it’s their principal residence, a vacation property, or small- and medium-sized businesses. These assets are all tied to the Canadian economy, which itself has underperformed relative to global peers.

Canada’s GDP growth averaged just over 1.6 per cent annually from 2013 to 2023, compared to approximately 2.2 per cent in the United States and even higher growth in emerging markets like India and parts of Southeast Asia. That means Canadians are often doubly exposed—their investment portfolios and their other assets are heavily reliant on a relatively sluggish domestic economy.

The trade war temptation

In the context of the current trade war with the U.S., the temptation to pull back from American investments is understandable. The uncertainty around tariffs, political rhetoric and diplomatic tensions creates a fear-driven environment. But making long-term investment decisions based on short-term headlines is rarely a wise move.

History has shown that global diversification is one of the best ways to manage risk and enhance returns over time. The U.S. market continues to be home to many of the world’s most innovative and profitable companies. Likewise, emerging markets offer growth potential that simply doesn’t exist in a mature economy like Canada’s. Completely abandoning or underweighting these opportunities can significantly hamper portfolio performance.

Separate emotion from investment decisions

Investing is inherently emotional. We want to feel safe. We want to support our home country. And during periods of uncertainty—especially involving national pride or political conflict—those emotional instincts become even stronger. But successful investing requires discipline and objectivity.

Allowing emotion to dictate your asset allocation can lead to costly mistakes, including excessive concentration in underperforming markets and missed opportunities abroad.

The best course of action? Stay diversified, remain invested and work with a professional financial planner who can help you navigate geopolitical noise without sacrificing your long-term goals.

The trade war may pass but the consequences of a poorly diversified portfolio can linger for decades.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.