The Importance of International Share Exposure

I would like to share some insight into investing in international shares as part of a long-term diversified portfolio. You may not be aware, but the Australian share market only represents around 2% of the total capitalization (market value) of world equity markets.

There are over 13,000 listed companies to choose from on major overseas stock exchanges outside of Australia. By investing only in Australian listed companies, you may be missing out on great investment opportunities that the other 98% of the world’s share markets have to offer. Some of the world’s fastest growing industries such as health & biotechnology are not well represented in the Australian stock market.

Investing internationally also offers exposure to well recognised brands such as Microsoft, Apple, Google and Nestle, just to name a few. International shares have traditionally offered strong investment performance over the long-term, as can be seen in the chart below, which shows the value of $10,000 invested since January 1970, assuming all dividends have been reinvested along the way (source Vanguard).

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Whilst investors in Australian shares have done well over the long-term, in the past 4 ½ years US shares have actually outperformed our local share market by 6.5% a year! That’s not to say that this trend will continue over the longer term, but it does highlight the need to also include international shares as part of the growth component of your portfolio.

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The largest sector in international markets is financials which makes up 19.2% international share markets, while the largest sector in Australia is also financials, which makes up 36.5% of the total Australian market. Investing in overseas shares offers a greater diversity across industry sectors than would otherwise be the case if you only held Australian shares.

It’s a sound investment strategy to spread your investments around, or diversify, not only between asset classes but also across countries. This can reduce your portfolio risk and enhance returns because it’s unlikely that all investments will perform the same way at the same time. A well-diversified portfolio will not be over-exposed to any one economy or individual country’s share market returns.

By diversifying your portfolio across Australian and international investments, your Australian shares can provide regular income (dividends) as well as capital growth, while your International shares can provide long-term capital growth and some income – particularly to industries not well represented in the Australian market.

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In summary, each asset class offers a different level of risk and return. Typically, higher risk asset classes (shares and property) return more than lower risk asset classes (cash and fixed interest), to compensate the investor for the risk of owning them. If you combine Australian shares with international shares as part of the growth component of your super or investment portfolio, you can not only lower your overall investment risk but also smooth out your returns over the long-term.

If you’d like to review your overall investment strategy or superannuation portfolio, or would like to know more about investing, please feel free to call our office on (02) 8776 0104.