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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that’s an excellent question and encouraging in these times with all the bad news around the pandemic. Great to see you focussed on the long-term wealth creation opportunities that this event has created. Gavin our approach is often to focus on the investment products last. The reason for this is that we believe that quality active management will take care of itself over the long term, and firstly we would want to ensure that you are investing in concert with your appetite for risk. We will assume that we know your investment timeframe is at least 18 years plus, since you wouldn’t be able to access Superannuation until then, and therefore provided you are growing wealth for retirement, rather than a shorter-term outcome, you may fit between Moderate, Balanced or Growth investment risk profile. The sharp market falls seen since late February, has certainly given younger investors extra incentive to move their risk appetite higher up the growth profile. You may have seen this news - and we’d hope you are being sensible in your investment choices, and maintaining a long-term perspective. We will often try to gain an understanding of how you invest, how long you’ve been an investor, and what some of your strategies have been. After all it is your money, and we foster a collaborative approach with our clients.
Once we determine your risk appetite, we would be able to recommend the amount of appropriate exposure generally to growth assets and advise on a prudently constructed portfolio of a mix of ETF’s (Exchange traded funds), Direct Shares, and a few well-regarded active fund managers. By way of background, ETF’s are similar to a managed fund, in that they are open ended funds, yet they are traded on the share market. There are both passive ETF’s that will track the performance of an index or sector, or asset class, and they are often cheaper relative to the cost of a similarly constructed active managed fund, due to the lack of “active manager” fees.
When we compare Australian Share market to international markets one of the attractive aspects broadly and historically for the Australian share market has been the higher dividend yield (including added benefit of franking credits) when compared to other markets, ie:
Avg dividend yield for S&P ASX200 = 4.2% (source) vs;
Avg Dividend yield for S&P500 (US share market)= 2.05 % (source) vs:
Avg Dividend yield for NASDAQ 100 = 1.04% (source)
Now, we think you should hold investments from all of these markets amongst many others, including domestic and international listed property, bonds, cash etc, however the concept of long term compounding can be enhanced via dividend reinvestment. From that perspective the Australian sharemarket is attractive, however investing globally can also provide growth opportunities due to higher rates of company profits being reinvested when compared to their Australian counterparts. Obviously not all company’s dividend reinvestment, and dividend stability is currently one of the major issues present in most economies, based on the daily announcements coming thick and fast from companies across many sectors of the economy. Rather than focus on any particular company have a look at some of the regulatory effects possible on dividends. Again, taking the long term view the likelihood of the aforementioned average dividend yields to recover and hold within those various markets remains strong. We would advocate having a more balanced mix between Australian & International shares, in order to gain access to companies and sectors not overly represented in Australia.
Practically Gavin, there certainly may be some sectors locally and globally that are affected for longer than others due to this pandemic. As such, caution is required in stock selection to ensure balance across all sectors. Hospitality, Tourism, Commercial Property are but some sectors of the economy both here and overseas that could possibly be hit the hardest for longest. Diving into those sectors takes strong nerve, and the ability to possibly overcome a lot of immediate & future volatility, and reduction in dividends before stability returns. As such a portfolio that takes on some of those sectors should be done after extensive research on companies that may be better placed to handle the current environment, and what the world looks like post pandemic.
It quite likely that major labour force, social, and cultural shifts may occur as it relates to certain “normal” day to day activity, and you want to ensure your portfolio has enough mix and diversification to have a broad spread across economies, sectors/industry, and companies. As International markets make up greater than 97% of all equity markets, holding investments across the U.S., Europe, Asia, Emerging Markets (including India, Brazil, etc) is well worth considering, and it doesn’t have to involved paying large brokerage to buy direct international shares. Many ETF’s with an active (beta) focus on sectors may be worth considering. One of the stronger market recoveries during the pandemic has been the NASDAQ, showing only a 9.9% drop from its previous high in mid-February. One of the reasons that this index, or companies within it may be worth considering is the potential Work from Home (WFH) shift we may see as the world recovers from COVID-19. This response is generic in nature, but certainly companies in areas such as cyber-security, robotics, software development, networking, component parts etc may benefit from any major upcoming shifts. There are many active ETF’s, passive ETF’s, exchange listed managed funds etc that can offer you exposure to these and many other industries and markets by utilising reasonably priced products. All the best on your wealth journey, and remember the wise words of Albert Einstein: Compound interest is the 8th wonder of the world: He who understands it, earns it, he who doesn’t, pays it”
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