Alison Griffiths

Last week I wrote about how to lower fees on mutual fund portfolios and give your returns an immediate boost. This week I’m looking to the future.

Where are the investing stars and pooches for 2013? Well, we know how things lined up in 2012. The Canadian stock market was a basement dweller, though it did end in positive territory. Everyone hated Japanese stocks — again, and by December pretty much everybody was wishing they’d taken a bigger bet on the U.S., especially financial, housing and energy stocks.

Is this 20/20 hindsight going to help in picking the right places to invest in 2013? Most market watchers will say no. But I have a secret tool at my disposal, which allows me to say yes.

Of course, this goes completely against traditional investing wisdom. I’m sure you’ve read some version of, “Past returns are not indicators of future performance,” in relation to investing. That disclaimer appears everywhere in the investing universe.

However, the secret tool I am about to reveal to you has guided my investing for years. It allows you to use the past as a guide to the future and is called Morningstar (formerly Andex) Asset-Class Winners and Losers chart. You can get your own copy through your bank or financial institution or check it out here.

A brief perusal of recent history shows that if you have been heavily invested in the domestic stock market — as most Canadians do through their RRSPs — you’ve done quite nicely since 2003. Until the end of 2010, the Canadian market finished first or second in performance with the following total returns for the S&P\TSX Composite Index (total returns include price plus dividends):

2003 — 26.7 per cent

2004 — 14.5 per cent

2005 — 24.1 per cent

2006 — 17.3 per cent

2007 — 9.8 per cent

2008 — 33 per cent

2009 —35.1 per cent

2010 — 17.6 per cent

Not too shabby. Except for 2008, when Canadian stocks were the worst performer globally, losing 33 per cent, staying at home has been good for Canadian investors.

The last couple of years have been a different story. The Canadian market sagged in 2011, ending up with a loss of over eight per cent compared to the S&P 500, which gained a modest 4.4 per cent including dividends. In 2012, we were back in positive territory but total returns domestically were barely over five per cent.

The experience of the last two years, combined with the recovering U.S. economy and bright spots internationally, such as Singapore, New Zealand, Sweden, Ireland and Denmark, have led many pundits to urge Canadians to get out of town, er, the country.

Just the other day, I watched a series of experts on various media outlets tell Canadians that we need to move more money into international markets or we will be stuck with sub-par returns.

The Winners and Losers chart tells me they’re wrong. Throughout the 1990s I heard much the same refrain about where Canadians should invest. During most of that decade the U.S. market was first or second for eight out of nine years (I’m including both large and small companies in this case.)

And I vividly recall what the experts said. Get out of Canada! Though the domestic market had some good years in the 1990s, it was overshadowed by both U.S. and world stocks. But if you had bet the farm on this advice and severely reduced your exposure to Canada you would have missed the mostly great returns of the next decade.

Bear in mind that most investors aren’t nimble enough to get out of souring investments at the right time and into shining ones.

Also, if your investments had not been hedged to eliminate currency fluctuations, you would have found yourself with reduced returns once international currencies were changed into Canadian funds. Our loonie has been climbing steadily since its low point of 62 cents against the greenback in early 2002.

I can sense a bit of impatience out there. You want the magic answer to the question; where do I invest in 2013? The Winners and Losers chart makes it clear: it’s impossible to know which market will be a winner in the future. The rankings change as often as a model changes clothes.

The answer (not necessarily a magic one) is to be diversified and don’t switch every year based on expert predictions. Canada may have a couple of subpar years but come roaring back. All of Europe may be a darling tomorrow and even Japan could become a favourite destination.

You should have investments outside Canada but don’t overdo it. Of your total equity holdings (mutual funds, stocks or exchange-traded funds), you might pick 60 per cent to be Canadian, 25 per cent American and 15 per cent European. This is just an example. The point is, pick your percentages and stick to them over time. That is the only sure way to invest in 2013.

Contact Alison at griffiths.alison@gmail.com or http://www.alisongriffiths.ca/.