Are we crazy to invest overseas?


Unless you have been in limbo for the last 10 years, you would have noticed that the Australian share market has outperformed international markets over the past decade. Australian shares have outperformed while the US and Europe have been like a quagmire slowly sucking up and depleting our investment funds. SMSF funds have traditionally had a low exposure to this sector and that has paid off in the last 10 years but prior to 2000 it meant they were underperfoming. Has the time come to look at this sector again with potential for another significant drop in the Aussie dollar over the next few years and stellar returns on international funds  as well as improved outlook for the US and Europe as our economy slows? International Investing

The  question for investors is “why should we invest our savings anywhere else other than Australia?  Time to look deeper into an explanation of why Australia has done so well and can it continue or do we need to be looking ahead of the pack for likely changes.

I read recently on the Motley Fool website a warning about false statements like “Diversification is the monster that needs stabbing, because world markets are actually becoming more closely correlated to our home markets, not less”. If this was true then why would we take on currency risk and invest internationally?

Fund managers, asset consultants and financial advisers maintain that good asset allocation is the biggest key to long-term investment returns. However, looking at the ASX200, we realise immediately that our Banking(financial services) and Mining & Resources(20%) sector account for 52% of our index. In comparison, the commonly used benchmark S&P500 only has 30% in these two sectors.

This huge bias is the key reason for the outperformance over the past decade as both of these sectors have had strong returns. The banks prospered through low international borrowing costs and massive consumer driven spending financed through increased household debt while the Chindia (China & India ) story was and still maybe the basis for resources growth here in the “lucky country”. This bias also provides greater risks and when the resources/commodities boom ends and/or our residential housing sector slows down, investors will truly need to think twice about having their money so heavily invested in these two sectors. Now don’t kill the messenger or rush to argue, I am not saying its imminent or that these are poor investments but the markets do go in cycles and better to be ready than blind. Even for a long-term investor you need to choose your entry and exit points in to any investment and while I don’t recommend trying to time markets, neither do I recommend ignoring historical trends and experiences of past cyclical highs and lows!

This is one of the big reasons why it is still important to allocate a certain percentage to international markets. I look for funds and investments that are easy to explain and one of those for example is the Magellan Global fund that invests in global household names like Ebay, Microsoft, Yum Brands (owner of KFC and Pizza Hut) and Novartis (global drug company owns brands like Voltaren and Ritalin). These are brands we all know and use and what is more important, the emerging middle classes in China, India and South America will aspire to obtain their products , so I can see where their current income and future earnings growth will come from.

I wish I knew the exact time when Australian markets would start to underperform and when international investments would pay off  but no one can be certain and by the time it becomes “blatantly obvious” we probably will have missed the boat, so I continue a strategy of diversification with a allocation into international funds with a proven record of  investing in companies with consistent earnings and potential for income growth over the long-term.

Liam Shorte B.Bus SSA AFP

Wealth Advisor & SMSF Specialist Advisor™

SPAA SMSF Specialist Logo Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook  Google+     

Verante Financial Planning

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in Verante Financial Planningl, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

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