I’m 42 and currently employed. I currently have 150K invested in mainly Australian shares. Should my international vs national stock investment distribution change because of the Covid-19 Pandemic? If so, where should I concentrate?
Gavin in Cronulla, NSW
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Thank you for your question.
Most Australian investors have a significant home country bias familiarity, perhaps due to ease of access, removal of currency risk and the benefit of franking credits.
Home-country bias has negatively impacted investor returns, due to Australian shares returning an average of 7.9% per annum over the ten years to December 2019 compared to 16.4% per annum from US Shares and 12.3% per annum from International Shares (unhedged) as shown in the below chart supplied by Vanguard:
The COVID-19 Pandemic is prompting many investors to rethink their investment portfolios, however, the basic principles for constructing an investment portfolio remain constant irrespective of current macro-economic events.
Timing investment markets is difficult due to unexpected events being a significant cause of disruption to markets. Who in November 2019 would have foreseen that a virus originating from China would trigger the largest recession since The Great Depression?
Despite the difficulty in timing markets, there are times where assets appear overvalued or undervalued and this can be an opportunity to adjust your portfolio. In late 2019 we became increasingly concerned by the high prices that many assets were trading at and the potential for a significant correction in the event of negative developments. Whilst we couldn’t have known that shock would arise in the form of COVID-19, we knew that any such shock would have a significant impact on markets. As a result, we had adjusted our client portfolios to their maximum defensive weighting. This also provided the opportunity to purchase additional investments after prices had fallen.
Despite the difficulty in predicting returns from each asset class, we believe there is opportunity to achieve improved investor outcomes by adjusting the allocation to each asset class rather than retaining a fixed allocation. These opportunities arise due to the irrational behaviour of investors.
To help manage risk, reduce volatility and smooth out returns, most advisers would recommend their clients establish portfolios that are diversified across fixed income, international shares, domestic shares and alternatives such as precious metals. The allocation to each of these asset classes is based on long term return assumptions, client risk tolerance and return expectations.
Diversification benefits aside, excluding international shares from your portfolio limits your investment opportunities. Australia accounts for between only 2% and 3% of global share markets. The Australian share market is highly concentrated in the financials and materials sectors and has limited exposure to Information Technology and Health Care.
Now that we’ve established that there’s a strong case for diversification across asset classes, the next step is to determine the allocation to each asset class that is appropriate for you. This will ultimately come down to your personal goals and objectives, investment timeframe, tolerance for risk and return expectations.
For example, a suitable portfolio for an investor with a growth risk profile and a long-term investment timeframe would ordinarily have an 85% weighting to growth assets (Australian Shares, International Shares, Property & Infrastructure) and a 15% weighting to defensive assets (cash, fixed income and defensive alternatives). Within the growth asset component of the portfolio, we currently allocate 29% to Australian Shares, 48% to International Shares and 8% to property and Infrastructure. This allocation will change over time.
A financial planner can help you identify your goals and risk tolerance before recommending a portfolio suited to your needs.
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