Thinking about investing in international markets? This is why it’s a great time to take to leap.
If you’ve been keeping an eye on the stock market lately, you’ve probably noticed it’s been on a bit of a tear. From tech giants to commodities, international markets are delivering jaw-dropping returns in certain places. Tesla added $300 billion to its market cap since the US election. Bitcoin’s market cap surged beyond $1 trillion earlier in the year. The S&P 500 has ballooned by $13 trillion in 13 months, while Nvidia alone has added $2.4 trillion to its value in the past 17 months.
By comparison, the Australian sharemarket, while chalking up record highs itself, has not performed nearly as well as the US. The Aussie market is dominated by resource stocks which have been hit by falling commodity prices, while the US market is being driven by technology stocks.
It’s some really incredible growth, and it’s indicative of the opportunities that are within reach for investors who are willing to look beyond our local shores. But before you dive in, there are a few things to consider.
The case for investing overseas
Our economy might punch above its weight most of the time, but when it comes to the global markets we’re just a small fish in a pond that’s much larger than we sometimes like to imagine. That’s why acquiring international stocks can expose you to some of the world’s biggest and fastest-growing companies.
“Australia is a small part of a very big pond when you look at global markets,” says Ben Nash, Founder of Pivot Wealth. “Investing in Australian shares is important because they’re denominated in Australian dollars, and you can’t buy your morning latte with US dollars. But if you confine yourself to Australian investments, you’re really missing a trick in terms of the global markets and the growth that’s there.”
Take the US. It’s home to the Magnificent Seven – tech powerhouses Meta, Amazon, Google, Apple, Microsoft, Tesla and Nvidia – which have grown 13.5 times larger in value since they were all public entities in 2012. They’re dominant in their respective sectors and are driving the incredible growth we’ve seen in the stock market recently.
How much of your portfolio should head overseas?
It’s the million-dollar question: how much of your portfolio should you funnel into overseas investments? The answer, as always, depends on your risk tolerance and your long-term financial ambitions.
“For a high-growth investor who has 90 per cent of their portfolio in stocks, we typically look at a 35 per cent allocation to Australian shares and 55 per cent to international shares,” says Nash. He explains that this lopsided split makes sure that your portfolio benefits from the growth of global markets while still keeping a good amount of exposure to the stability of local investments.
That said, investing overseas of course comes with risks. Currency fluctuations can have a big impact on your returns, not to mention geopolitical events that can quickly become volatile. We’ll just have to wait and see how the new administration in the US affects the markets over the coming years.
But these risks are part and parcel of any investment strategy. Share investments are long-term investments for most average investors. You’ve got to think in terms of a seven- to ten-year timeframe to ride out the ups and downs of the market.
The stock market boom
It’s hard not to be impressed by the numbers we’re currently seeing in the stock market. But this isn’t just a fluke – it’s a reflection of global economic trends and shifting investor sentiment. Falling interest rates in the US and growing investor confidence has been a real boost to investor confidence.
When interest rates fall, we see asset values increase and with rates in the US to come, plus proposed tax cuts, this should be good for their market.
But be cautious about getting swept up in the hype. A lot of investors are sitting on the sidelines, nervous about a market correction even though they’re currently missing out on the current run up in values.
Arguably the world’s best investor, Warren Buffett at Berkshire Hathaway, is sitting on a record amount of cash in his portfolio waiting for a correction. For us mere mortal investors you need to stick to your strategy and not try to time the market.
How to make the most of the opportunity
If you’re ready to take the plunge into overseas investing, here are a few tips to keep in mind:
- Start small: You don’t need to allocate half of your portfolio (or more) to international stocks straight away. Start with a manageable percentage and increase it as you get more comfortable with it.
- Use ETFs: Exchange-traded funds are a way to invest in overseas markets without exposing yourself to just one or two international stocks. In other words, they’ll give you instant diversification and expose you to global giants like the Magnificent Seven.
- Keep costs low: Watch out for fees, especially when investing internationally. High fees can really eat into your returns if you plan on trading fairly regularly, so shop around for low-cost brokers and funds.
- Get advice: If you’re unsure about where to get started or how to manage the risks, a financial advisor will be your best advocate.
