Global markets give Australian investors a much bigger set of opportunities compared to only investing domestically, increasing diversification and reducing risk. This can lead to higher market performance over time.
Global share market indices have significantly outperformed the local share market, year-to-date. The MSCI All Country World Index is up around 14.3 per cent, the US S&P 500 is up 9.2 per cent and the Nasdaq 100 is up more than 30 per cent.
Over the same timeframe, the S&P/ASX 200 is down 3.7 per cent.
For Aussie investors, it’s a timely reminder to check your portfolio’s home bias, that is, the degree to which it’s exposed to local assets at the expense of a broader global profile.
For instance, sections of the healthcare industry, aspects of the semiconductor industry and parts of the internet and technology industries are all under-represented in Australia. So investing in local assets means missing out on returns from these industries.
Over-emphasising Australian assets in a portfolio at the expense of global stocks also heightens risk.
“One thing all economists agree on is diversification is a free lunch. By going global, you get a fair amount of diversification,” says Bhanu Singh CEO, Dimensional Fund Advisors.
“There’s too much risk in your portfolio if you’re just invested in the four banks and BHP,” he says.