Should I cover global markets or focus on Australia

Question

I believe Australian stocks make up about 4% of the world market, but I could be wrong. Should I cover global markets or focus on Australia? I'm setting up my investments and currently have about 30% in Australian stocks. Is that too high?

Answer

You’re correct in noting that Australian stocks represent a relatively small portion of the global market, typically around 2-4%. Despite this, many Australian investors tend to have a higher concentration of local stocks in their portfolios. This can be attributed to several factors, including familiarity with local markets, currency considerations, and tax benefits such as franking credits.

When deciding whether to focus more on Australian stocks or to diversify globally, it’s important to consider a few key aspects:

Diversification: Investing globally can help reduce risk by spreading your investments across different economies and industries. For instance, sectors like technology are underrepresented in the Australian market but heavily weighted in the US markets.

Home Bias: This is the tendency for investors to favor their own country’s markets. While this can feel more comfortable, it may lead to a concentration risk. Balancing this with international investments can potentially offer better risk-adjusted returns.

Currency Risk: Investing internationally introduces currency risk. If the Australian dollar strengthens against other currencies, your returns could be negatively impacted when converting back to AUD. Conversely, a weakening AUD could enhance returns.

Tax Considerations: Australian equities come with franking credits, which can be beneficial for tax purposes. This is unique to Australia and can make local stocks more attractive from an after-tax return perspective.

Given that you currently have about 30% of your investments in Australian stocks, you’re actually aligning closely with a balanced approach that many Australian investors adopt, often varying between 20% to 40% in local equities. Whether this is too high for you might depend on your individual risk tolerance, investment goals, and time horizon.

Using a platform like Pearler, you can efficiently manage and adjust your portfolio allocations based on your investment strategy and changing market conditions. Pearler’s focus on long-term investing and features like auto-invest can help you systematically invest and maintain your desired allocation across Australian and international equities, helping you to stay disciplined and aligned with your financial goals.

You can find out more about this topic here: How I Apply Modern Portfolio Theory To My Fi Strategy

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Amir.

Firstly, everyone invests differently, from 100% Aussie shares, all the way to 100% global shares, and everywhere in between.

So you won’t get an opinion that everyone agrees with.  In this sense, there isn’t a right and wrong, just different risks.

You’re right, as a country Australia is relatively small compared to the rest of the world.  On the other hand, we get tax benefits in the way of franking credits that others can’t get, which are quite valuable.  30-40% seems to be a popular level, and it’s actually what a lot of super funds choose.  I think VDHG and DHHF also have roughly this level of exposure to Aussie shares.

To me, that suggests you’re in pretty good company.

Hope that helps.
Dave

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INVESTING STRATEGY

Amir Ibrahim.

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Dave Gow - Strong Money Australia

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