Break for the border

There’s a world of opportunity for investors who venture beyond the small, concentrated local market

- DAVID THORNTON

When it comes to investing in shares, it can be easy to default to the Aussie market. But this forgoes the raft of benefits on offer in international equities.

Don’t box yourself inside the borders. Australia has great investment opportunities to be sure, but they’re limited. We make up roughly 2.1% of the MSCI World Index, so it follows that you’re missing exposure to 97.9% of the global market.

What’s more, the Aussie market is concentrated in only a few sectors. “The Australian sharemarket has become increasingly concentrated into just two to three sectors, being banks, mining companies, and consumer or grocery retailers, with limited exposure to those sectors exposed to the most powerful global themes,” says Drew Meredith, director, and adviser at Wattle Partners.

This exposes the investor to a high degree of concentration risk. If you are wholly invested in the Australian market, then a downturn in two sectors would see your whole portfolio suffer.

International exposures add much-needed diversification: the more bets you have, the less hurt you’ll feel if any one of them goes bad.

If you really want to max out on the diversification benefits offered by international equities, consider investing across developed and emerging countries – two markets with historically low correlations. So, movements in one won’t be felt by the other.

Layer of protection

In addition to the diversification you get by holding international equities, they provide investors with access to sectors and thematics that, even if available here, don’t exist on the same scale.