With protests in Hong Kong and an unresolved trade war between the United States and China, this may not seem like a wise time to invest abroad.
Looking beyond current events however, a sound investment strategy starts with an asset allocation, aligned to an individual’s goals, that is built upon reasonable expectations for risk and returns over the long-term. Well diversified investments can help investors avoid being overly exposed to unnecessary risks.
Sticking with Australian companies whose names you know may provide a comfort factor, but there’s a chance you could be leaving yourself open to some risk. As my colleague Aidan Geysen wrote recently, the portfolios of Australian investors are often highly concentrated in a small number of Australian-based companies, a risk known as home-country bias.
Underweighting international assets could cause investors to miss opportunities to temper market swings. Politics, industries and consumer sentiment vary widely by country, generating different rates of national and regional economic growth. These variations can make your portfolio less vulnerable to downturns. During the 1990s to 2000s, for example, global equities outperformed Australian equities, so investors who owned both asset classes benefitted. At other times, Australian assets have outperformed.
While investors can choose funds that focus on a single country, constructing a portfolio that is well-diversified geographically will provide additional protection against volatility related to individual economies. For example, investors could choose to add to an Australian-centric equities portfolio through a global equity fund that tracks the MSCI World (ex-Australia) Index can achieve broad geographic exposure providing investors access to about 1,600 large and medium-sized companies across 22 of 23 developed countries. Top holdings include Nestle, Johnson & Johnson and Facebook, global brands that derive revenue from around the world.
Australians are increasingly using exchange traded funds (ETFs) to increase their exposure to international assets potentially due to their accessibility and diversification at low cost.
When you travel, currency fluctuations influence how much you get for your Australian dollar. Currency fluctuations affect international investments in a similar way, so you will need to consider whether you want to invest in a fund that hedges against that risk.
It’s important to remember that while international exposure is a great way to increase balance and diversification within a portfolio, it should be done in line with investors’ long term goals, rather than as a reaction to market events or cycles.
Sticking with an asset allocation strategy aimed at achieving your financial goals in a low-cost, diversified portfolio is more likely to lead to investment success than buying and selling in response to fear or volatility.
Please contact us on 02 4605 0350 if you seek further assitance on this topic .
Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2019 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page