An American diet of hot dogs and fries may not be great for your health, but being too "Australian" focused when investing could be damaging to your wealth.
The global financial crisis significantly increased investors' worst fears about the stockmarket being risky. As a consequence, many consider it prudent to play it safe by investing in domestic markets and companies they know. Yet the ideal investment portfolio is believed to be all about diversification and against putting all your eggs in one basket. Standard investment portfolio theory says investors should diversify across many markets in the hope that when one falls another will rise to smooth out the final result.
Based on this conventional wisdom, Australia – representing just 3% of the global economy – deserves just 3 cents of the investment dollar. But Australian investors usually ignore this rule and, on average, put nearly 80 cents into local investments. The bias to investing at home, instead of abroad, comes at a price – a higher cost of capital for businesses.
The recent credit crunch hit America hard because its popular managed funds had invested 87% in domestic companies, and many were affected by the severe US recession. Yet that is not as parochial as some other countries – Japan, China, Brazil, Taiwan, Thailand, India and Malaysia – where more than 95% is invested locally. The exceptions to the rule, with less than about 30% invested at home, are Austria, Belgium, Denmark, Germany, Hong Kong, the Netherlands, Singapore and Switzerland.
The local market also has a heavy leaning to resources and small-caps relative to the MSCI World Index. So while the Australian index has generated higher returns, it's a narrower and riskier market. Most informed investors are aware of the domestic market's financials and resources tilts. This helped fuel the strong returns from the Australian share market over the middle of the past decade, but it was also a principal reason why the local market was challenged in 2008.
The two aforementioned sectors accounted for almost 60% of the S&P/ASX 300 Accumulation Index at March 31 2009. On the other hand, very few technology, healthcare or consumer staples firms are local index constituents. The last two were the place to be in 2008, and savvy global share fund managers were able to position their portfolios appropriately. "Australian-only investors don't have this luxury."
Ask your advisor about a "Global Trader" Managed Account Service.
Charles Moore
CEO VillageMall Pty Ltd
+61 7 3256 7465
+61 7 3256 7465
