2. Why invest in international markets?

Investing in international markets provides the opportunity for diversification and gives you the ability to access some of the world's most recognisable and loved companies.

 

In short

  • International shares offer the chance to increase your portfolio’s diversification
  • Geographic diversification is a higher layer of variety than just sector diversity
  • You can gain access to some of the world’s most well-known companies
  • Some sectors overseas are much more developed than in Australia International share trading provides the opportunity to trade in these shares

Diversification

 

The more variety in your portfolio, the less exposure it will have to any one particular risk. So, investing in international markets increases your diversification.

If you only buy Australian shares, your portfolio will become intrinsically linked to the local economy, no matter how diversified you make it. If the domestic economy is going well, your portfolio will too. If it sinks into recession, your portfolio might depreciate.

Adding international shares gives your portfolio a global perspective; it’s not just about the company you invest in—you also gain exposure to the home country too. Buy enough shares from say Italy, and your portfolio will add that country’s characteristics to its overall performance.

Some countries have also embarked on large economic stimulus measures designed to boost economic growth. Buying international shares listed in these countries can give you exposure to this stimulus driven growth.

 

Access

 

Not only is the Australian sharemarket relatively small, but it tends to be dominated by financial and mining companies. International sharemarkets can give you access to sectors that are under-represented in Australia—or not represented at all. For example, the US stock exchanges offer excellent exposure to the pharmaceutical, aerospace and artificial intelligence sectors, as well as technology stocks. The Australian sharemarket might offer some exposure to these sectors, but they are better represented in the US.

Market cap data is free-float adjusted from Bloomberg securities data. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes only. 

Case study: Diversification

Jack’s worried about the Australian economy and its reliance on commodity prices. Every time the price of iron ore drops, his portfolio of Australian shares goes down. Lower commodity prices might be terrible for Australia, but surely some countries might benefit from cheaper raw materials?

Jack thinks, if the price of iron ore goes down steel might get cheaper. A big manufacturing country like Germany should benefit, right? They could produce more cars made of cheaper metals at a higher profit margin if the price of iron ore drops.

So, Jack adds some German shares to his portfolio. They tend to move in the opposite direction to some of his Australian shares which are more linked to the price of iron ore. This is good, because when the iron ore price declines, he might see his German shares appreciate, cushioning the impact it has on his Aussie stocks.

Case study: Indexing

Jill loves technology and investing, but the biggest names are listed overseas, usually on the US’s NASDAQ. She’d love to buy some shares in her favourite companies, but she doesn’t know if she can handle the high risk that comes with investing in technology. She really doesn’t want to miss out though.

An ETF that invests specifically in shares on the NASDAQ could be a great solution. The Betashares NASDAQ 100 ETF trades on the ASX and it invests in a number of her favourite tech companies, like Tesla, Apple and Microsoft.

Exchange-traded funds (ETFs) are highly diversified and they track an index, so she doesn’t have to worry about each individual share. If companies listed on the NASDAQ perform, so too will her ETF investment. Not everyone has the time and money to research and buy a whole range of international shares. Using passive investing strategies, such as ETFs, is a great way to cost effectively add international exposure to your portfolio. Click here for a breakdown of ETFs.

Disclaimer

CommSec Learn is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly CHI-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

 

 

Disclaimer

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