Canadian investors buying U.S. stocks can get international exposure—especially when looking at the Consumer sector for investments

Long before 2021, and, indeed, for several decades, we’ve advised Canadian investors to spread their holdings out geographically between Canadian and U.S. stocks. Our view is that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in U.S. stocks, with the remainder primarily in Canadian stocks. That can provide all the international diversification you need.

Are you interested in buying U.S. stocks in Canada? Generally speaking, Canadians can find some of their best U.S. stock opportunities in the Manufacturing and Consumer sectors. That’s where the U.S. market tends to offer larger and more internationally diversified firms than you can find in Canada.

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Buying U.S. stocks in Canada: The Consumer sector

One of the five main economic sectors for investing is the Consumer sector. Companies like Proctor & Gamble, McDonald’s and the spice company McCormick and Co. are all in the Consumer sector. Most top consumer stocks benefit from continuous, habitual use and have a steady core of sales, regardless of the economy and business cycles. These companies typically make products like soap or soup.

Furthermore, top consumer stocks can help provide protection against economic downturns because they are apt to fall in the middle, between the more volatile resources and manufacturing companies and the more stable Canadian finance and utilities companies.

At the Successful Investor, we like high-quality blue chip consumer-product companies because they can provide stability during a recession or economic slowdown.

Strong consumer product companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising cash flow and strong balance sheets. All these are also characteristics of top blue chip stocks.

Buying U.S. stocks in Canada may be the only foreign investing you need

Our view on foreign investing is that U.S. stocks can provide all the foreign exposure most investors need—if you include U.S. firms with extensive international operations. As mentioned, we also feel that virtually all Canadian investors should have 20% to 30% of their portfolios in U.S. stocks like those we recommend in our Wall Street Stock Forecaster newsletter.

If you want to add more foreign content, you could buy individual stocks on overseas markets. But for most investors, directly investing in foreign stocks can add an extra layer of risk and expense. As well, timely and accurate information about overseas companies is not always available, and securities regulations vary widely between countries. It can also be hard for your broker to buy shares on foreign markets without paying a premium. Tax rules and restrictions on transferring funds between nations add further uncertainty and cost.

So, when you invest outside Canada and the U.S., you may expose yourself to extra costs and hidden risks. Of course, investing in the U.S. market can expose you to unexpected dangers from the U.S. legal and regulatory systems. We keep these risks in mind when recommending U.S. stocks to Canadian investors.

There is strong potential for long-term gains with a diversified portfolio that follows our Successful Investor philosophy

You will improve your chances of making money over long periods, no matter what happens in the market, if you diversify your holdings across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

For example, Manufacturing stocks may suffer if raw-material prices rise, but in that case your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which push up the value of your Utilities stocks.

Bonus tip: Buying U.S. stocks in Canada is a safer idea than investing in U.S. real estate

Investing in U.S. real estate from Canada is not without risks. Here’s a look at some of the risks associated with real estate investing:

• Real estate is illiquid
• Expensive to manage and buy or sell
• Highly geographically concentrated
• Location of the property can make it hard to find tenants or buyers
• Physical problems like adverse traffic patterns or backed-up sewers
• Zoning changes that allow undesirable development or limit what you can do with your property

Most real estate investing millionaires earned their profits by taking on a lot of risk, worry, and work. They also went into it with realistic expectations and the intention of sticking with it for many years.

Furthermore, many also owe at least part of their real estate investing success to timing: they bought when real estate had been in the doldrums for years. If you buy at or near the end of a boom in prices, you may need to wait for a subsequent boom before you can sell for much of a profit.

However, if you do want to invest in U.S. real estate, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land.

Have you focused any of your investing in the United States?

What mistakes have you made with foreign stock investments?