In the 2016 Russell Investments/ASX Long-term investing report, domestic shares, bonds and cash yielded sub-3% returns for 2015. In the last ten years, traditional asset classes have lost momentum and investors have been encouraged to diversify their portfolio to include global asset classes.
Incorporating a global approach to your portfolio can provide valuable diversification and there is far more to global investing than shares alone. Managed funds that focus on additional asset classes like global bonds, global technology and even international property are also available.
The report also warns against traditional DIY approaches to achieve long-term investment goals. Investing overseas can involve extra risk and seeking professional financial advice is a must.
That said, let’s have a look at several reasons to support the case to invest globally:
1. More markets
The Australian Share Market represents only around 1.8% of all world Share Markets. By investing only in the Australian market, you don’t get to capture returns available elsewhere around the globe.
2. More investment opportunities
Access to a much greater range of companies. A typical Australian share fund invests in about 100 companies, while a typical international share fund can hold more than 2000 companies.
3. More diversity
Investing globally can help expand the range of investments available to an investor and add diversification to their investment portfolio. The Australian market is largely comprised of resource and financial companies. We don’t have much in the way of healthcare, information technology and large scale manufacturing companies.
4. More growth potential
Opportunity to access industries that are experiencing strong growth globally, but are under-represented in Australia. Particular sectors and countries may be well positioned to benefit from key long-term trends such as developments in technology and ageing demographics.
5. The Australian market is concentrated
The Australian share market have most of its companies concentrated in few sectors, but a smaller number of large companies dominate each sector. This means if a company underperforms, it has a significant effect on the market’s return and can affect the overall market sentiment. There are also fewer investment opportunities for those investors looking to invest in large blue chip companies.
6. Offshore investments can reduce risk
Your money is spread across a greater number of countries, industries and companies, giving you greater protection from wide swings in any single market. If you combine Australian and international shares, you can reduce the risk as well as enhance performance, compared with investors who invested only in the Australian market.
7. Currency effects
Currency can act positively as another level of diversification in an investment portfolio. When the Australian dollar falls, this is of benefit for the people invested in international share funds as the value of international assets in Australian dollars rise. However if the Australian dollar rises, returns for investors would not seem so positive. Herein lies the risk with currency as any losses or gains must be converted back into Australian dollars.
International investments should be regarded as a long-term proposition – an opportunity that can reap rewards as long as you understand and accept the risks involved.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.
