Special Free Report From The Motley Fool

If you’re like most Canadians, it may just be a matter of time until a huge hole is blown in your financial future.

That’s because most Canadians investors are, well, too Canada-centric.

Fortunately, there is a clear solution to this problem — if only more investors would take advantage of it.

But before I get into why this situation, left unchecked, is potentially deadly for investors—and what you can do about it—let me clarify something. I’m not bashing Canadian stocks. Far from it, actually. We Fools have made killer returns over the years investing in outstanding Canadian companies.

Take Canadian National Railway (TSX:CNR)(NYSE:CNI) — a recommendation in our U.S. Stock Advisor service since March 2008. We’re up more than 158% (more than 196% when dividends are included) since we recommended buying shares in this iconic Canadian company, which compares nicely to the S&P/TSX Composite’s return of only 5% over the same time frame.

And it’s not that there aren’t plenty more great businesses like CN Rail in this country. There are —and savvy individual investors can definitely outperform the index by investing in them.

But just outperforming the Canadian index isn’t enough. In fact, setting that as your goal can be a recipe for disaster.

The defective Canadian index

You see, investing in the S&P/TSX Composite Index leaves investors perilously undiversified. That’s because this popular index is highly concentrated in just three sectors: Financials, Energy, and Materials.

And not only is the S&P/TSX Composite concentrated in just three sectors—it’s overloaded in two of the most volatile sectors out there, Energy and Materials. The fates and fortunes of oil drillers and natural gas producers are notoriously explosive. And anyone who has lived through the past decade knows just how volatile the financial industry can be.

If you own almost any Canadian mutual fund, it’s likely that you too are highly over-allocated to these three sectors. And if you own individual stocks (and you’re in good company with us Fools!), you too may be over-allocated to Financials, Energy, and Materials, because the index—your benchmark of investing success—almost requires it.

So what if I’m undiversified?

Let’s kick back to Investing 101 for a moment. Investing is all about weighing risk and reward. Foolish investors know that you can lower your risk without reducing your reward by diversifying, which simply means owning a bunch of different stocks that move independently of each other. Plenty of studies have shown that you can reap most of the wonderful benefits of diversification by owning at least 20 or so stocks.

Of course, the assumption is that those 20 stocks move independently of each other. In other words, when one stock zigs, others zag, keeping your overall portfolio relatively stable and strong.

But with Canadian stocks predominantly falling into just three categories, there’s a good chance your stocks won’t move independently, and that means you could be missing out on the benefits of smart diversification.

What investors can do about it

If only there were another stock market we could tap into to round out the missing corners of our portfolios. A market with plenty of stocks to choose from … a market that can be trusted, with transparent information available on traded companies … a market with deep trading volumes, so you know you can always get into and out of stocks easily … a market close by, so you were already familiar with the products and services of many of the companies …

I’m talking, of course, about the U.S. stock market.

It seems almost ludicrously obvious that Canadians should look to the U.S. market to fill out the parts of their portfolios the Canadian stock market leaves wanting. And the smartest Canadian investors have known this for years, because they see that the S&P 500 index—the most popular U.S. index—is far better diversified than the S&P/TSX composite.

And not only is the S&P 500 more diversified, but it has also been outperforming the S&P/TSX Composite for several years now. Over the past five years, the U.S. stock market is up by 55%, while the Canadian market has lagged significantly, down 4.7% over this same period.

How to tap the U.S. stock market

Look, we’re not trying to make any sweeping statements about whether one stock market is any better than another. We are saying that just because we live in Canada doesn’t mean that all of our stock winnings need to be garnered here.

So, go ahead—keep most of your portfolio invested in Canadian stocks. We encourage it. But make sure you look to the U.S. stock market for outstanding stocks in those areas you just can’t get on the TSX.

To help you get started, in this Special Report we’re sharing the three U.S. stocks we think every Canadian investor should own. Read on to learn what they are and why you should own them.

U.S. Stock #1: Walt Disney

From Mickey Mouse to Snow White, the Jungle Book to Alice in Wonderland, Walt Disney (NYSE:DIS) has no shortage of ways to bring smiles to children’s faces worldwide. And this company of powerhouse brands can put a beaming smile on investors’ faces as well.

Disney’s vast empire includes ESPN, ABC, and the Disney TV channel, not to mention the renowned namesake amusement parks in the U.S., Tokyo, Paris, Hong Kong, and Shanghai. And then, of course, there is the Disney studio business—and that includes Pixar, the animated film company built up by Steve Jobs before he returned to Apple, and Marvel, the studio that created Spider-Man and more than 5,000 other characters. (The Fool actually recommended buying shares of both Pixar and Marvel in June 2002 and March 2003, respectively—before Disney acquired them. Those two positions appreciated by 2,408% and 383%, respectively.)

Disney is a brand powerhouse, earning a fortune licensing its massive collections of characters for toys, media, and other goods around the globe. And with the latest acquisition of George Lucas’ Star Wars franchise — the first film Star Wars: The Force Awakens has already grossed over $2 billion worldwide — Walt Disney is about to get yet another boost.

This stock is one of our favourites for so many reasons—and for Canadians, there’s one more. Disney’s one-of-a-kind business offers Canadian investors exposure simply unavailable on the S&P/TSX Composite. We think every Canadian portfolio should contain some Mickey Mouse.

U.S. Stock #2: Alphabet (Formerly Google)

Google was so dominant that it became a verb. The power of Alphabet (Nasdaq: GOOG)(Nasdaq:GOOGL) business model has made this company—which didn’t exist as recently as the late 1990s—already one of the largest in the world.

The undisputed leader in paid search, Alphabet processes more than 40,000 searches every second, or more than 3.5 billion daily. And the more we search, the better Alphabet gets at delivering the information we want—and at making money at it. Its AdWords and AdSense programs, which allow advertisers to bid in auction format for the most relevant search terms, practically mint cash; Alphabet generated about $26 billion in cash flow from operations in 2015.

Pursuing its mission to organize the world’s information and make it universally accessible, Alphabet has a number of ventures afoot designed to lock in more search opportunities. Android is the No. 1 mobile operating system; more than 900 million devices have been activated globally , and another 1.5 million are activated every day . People watch more than 6 billion hours of YouTube videos every month , and Alphabet’s Chrome browser has become the most popular on the Internet.  And we love knowing that co-founders Larry Page (also Alphabet’s CEO) and Sergey Brin, who own more than 5% of the company each, drive a culture of in-house experimentation and innovation that is sure to keep investors happy for years to come.

U.S. Stock #3: Starbucks

You know the joke—there’s a Starbucks (Nasdaq:SBUX) on every corner. But when you get right down to it, the ubiquitous coffee purveyor has plenty of growth ahead of it, and it’s not too late for investors to step inside and smell the profits.

Despite its staggering growth since its IPO, we believe it still has plenty of room left to run. Starbucks management is aiming for more than 1,800 net new stores in 2016, and given the store counts of similar businesses, this figure appears entirely achievable.

Store count is critical, because Starbucks is no longer just about coffee—it’s about brand. And stores are the brand’s touch point with customers. Starbucks has been adding plenty of new products (Bistro Boxes, Blonde Roast, and Refreshers, to name a few) and entire new brands (Evolution Fresh juice and Tazo tea).

The coffeehouse is just the starting point for Starbucks, which is rapidly transcending that label. It’s now about monetizing its brand, and that means selling Starbucks-branded products wherever people will buy them, including restaurants, grocery stores, and online. It is also increasing its presence on smartphones which accounted for 21% of all transactions as of October 2015. Investors filling their portfolios with dark roast shares today should enjoy a caffeinated ride—and Canadian investors will also enjoy the soothing feeling of knowing they are rounding out their portfolios with a stalwart business.

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