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International investments can be a boon for those who want to take the risk. But for those who aren't as savvy, looking over the horizon can be a daunting prospect.
In this article, we’ll look at why you may want to consider international investment, its benefits, and how to invest in overseas markets.
Ready to get started? Get in touch with us today to book in a free investment strategy session, and see where international investment can take your portfolio.
Why you should consider international investment
When looking to invest in shares, consider this: Australian companies only represent 2% of the total world share market. So it makes sense that you might consider international investment.
Investing overseas gives you access to some of the world's biggest companies, like Google and Amazon. It enables access to emerging markets like Asia and India.
It can also help you diversify away from just Australian investments, so that if the Australian market has a downturn, you’re not fully exposed to this.
Here in Australia, many industries are under-represented—or aren’t represented at all. For example, the MSCI World Index has an allocation of more than 25% to the fast-growing information technology and healthcare sectors. By comparison, Australia has less than 8% in these sectors.
The Australian market is highly concentrated with a large representation in the financial services and resource sectors. The top 10 Australian companies make up around 50 per cent of S&P/ASX 300 Index, with four out of the top five companies in the financial sector.
International investment is an important part of a well-constructed portfolio, and with good reason.
The advantages of investing in overseas markets
Improved risk/return profile
Diversifying your portfolio into international shares means that you’re not putting all your eggs into one local basket. You’re reducing your risk, and improving your chance for returns.
Different countries experience different economic situations, and their share markets might grow at different rates. Similarly, one country may also experience a downturn, while another remains unscathed.
Investing in overseas markets means you can take advantage of different share performance, while ensuring you don’t have all your investments reliant on one market.
Access more investment options
International investment opens up doors to a far bigger pool of investment options. Instead of just the typical Australian companies and industries, you can access globally-recognised brands that we just don’t have here. You get more companies, more markets, more industries—more choice.
Build a more diverse portfolio
International investment allows you to diversify your portfolio not just across companies and industries, but countries, and markets. By looking at shares in a range of different companies and geographic regions, you can reduce the risk of a specific geographic downturn affecting all your investments.
And not just that, you can access a far greater wealth of industries that are under-represented in the Australian market.
The disadvantages of investing in overseas markets
There can be different risks
The thing about investing in the Australian market is that it’s comfortable. You know the area, and you know how the country works. Investing in international markets opens you up to risk you may not even be aware of. There are different political, economic, and environmental risks to take into consideration, that all have an impact on your investments. These markets can be volatile, too, which means your portfolio is open to these fluctuations.
There are different regulatory rules
Here in Australia, ASIC keeps a close watch on the market to ensure participants are operating with integrity, and the markets keep ticking along as planned. But each different share market has its own rules and regulations. Where Australia’s is highly regulated, others may not be.
Regulators in international jurisdictions have different rules that govern their markets. This means that you may be more exposed to market fluctuations, and face greater risk and loss, before regulator intervention is involved.
No franking credits
One of the biggest disadvantages of investing in international markets is that you don’t get access to franking credits on the income from your investments. So you pay more tax on your investment income.
How to buy international shares from Australia
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Investing in overseas markets isn’t actually that hard. The most difficult part is doing your research and identifying which companies, sectors, or markets to invest in, and the best international shares to buy to achieve your goals.
The actual mechanics of investing are much the same as here in Australia.
There are a number of different ways you can invest in international markets.
Making direct investments
When making a direct investment, the share or asset that you purchase is being made in your name. As such, you’ve got a high degree of control over how your investment is managed—it’s up to you.
However, this also means that you’re directly liable for any risk that your investment takes on, and it’s all on you if your investment fails. On top of this, you’re also the one who gets affected by any taxes or regulations involved with international markets. So be sure to do your due diligence, and find out what you’re up against, before making direct investments overseas.
Making indirect investments
When making an indirect investment you’re purchasing an asset through a third party. So when looking at international investment, this is typically through a managed fund.
Under this method you don’t have much control over the management of your investment, so you don’t get to choose where or how your investment is handled. But the person managing it for you is an expert, so you can trust that they’re making the right decisions with your finances.
While investing in a managed fund is an easy way to add international investments to your portfolio, it can get pricey, too. You’re trusting your investments with another party, so expect to pay management fees every time you drop in to adjust your portfolio.
Get into ETFs
Another way to invest internationally is to start investing with Exchange Traded Funds. ETFs are packages of managed investments that you then invest in. They can cover different sectors, companies, or even include other markets, and are purchased on the Australian stock exchange like a normal share.
[content_aside]ETFs are a good way to expand your portfolio overseas, without needing to directly manage your overseas investments. Check out this article for more on ETFs.[/content_aside]
The final word
At Liston Newton Advisory, we believe that international investments play a part in a well constructed and well-diversified portfolio.
All too often, we see portfolios that only feature Australian investments. People think that international investments are too risky, or too difficult.
We choose to see it another way: only having Australian investments creates a higher risk concentration in your portfolio.
Instead, you could consider gaining exposure to international markets by investing in ETFs. This way, you gain access to the top companies in markets like the USA, Europe, Asia, and India. You don't have to try to pick the best companies, either, because you’re already buying the top 50 or top 100.
International investment is a smart choice. So it pays to get the right advice on managing your portfolio.
