Investing in Your Backyard

I’ve often written about a stock market close to the United States that I am very fond of: The Toronto Stock Exchange (TSX). Located in the Financial Capital of Canada, this exchange is the Canadian equivalent of the NYSE.

About five years ago, I started writing about how American investors should be buying stocks on the TSX for two reasons. First, the TSX is rich in resource and precious metal stocks, which I have been bullish on. Second, as the Canadian dollar gained strength against the U.S. dollar, American investors had the opportunity to also post currency gains from the rising value of the Canadian dollar.

The TSX hit a new record high yesterday. Over the past five years, the S&P/TSX Composite, the exchange’s main index, has risen by 108%. Comparatively, in the same period, the Dow Jones Industrial Average has risen by less than half of that amount, 53%.

But when we add the 40% currency gain the Canadian dollar has made over the U.S. dollar over the past years, Americans who heeded my advice five years and bought the basket of conservative stocks that make up the S&P/TSX Composite have seen a gain of 151%. That’s 30% a year from an index in your own backyard… not bad at all. (I refer to it as your own backyard because Canada is the country just north of the United States. While most Americans are more familiar with Mexico than Canada, the American and Canadian economies share many similar characteristics, especially entrepreneurism.)

I’m in the camp that believes that the worst is still not over for the U.S. dollar. While we may be witnessing a rebound in the value of the greenback right now against other world currencies, I believe that this current rally will be short-lived, and that the U.S. dollar will resume its long-term downward trend against other currencies.

I also believe that gold bullion will move much higher in price over the next five years than it has in the past five years. Because the S&P/TSX is so richly teeming with gold-producing stocks, gold at $3,000 an ounce will mean much higher prices for S&P/TSX stocks.

Finally, while I do believe that oil prices have moved too high, too fast, America is becoming more and more dependent on friendly Canadian oil. As tensions rise against other oil-producing countries, the United States can always depend on its neighbor for continued oil supply. Again, the S&P/TSX is rife with major oil- producing companies.

Investing in your own backyard continues to be a prudent investment strategy, in my opinion.