Balancing Australian and Global Shares in your Portfolio
When it comes to investing, finding the right balance between Australian and Global shares is a very important consideration.
While investing in the local market can provide comfort and tax benefits (like franking credits), being overweight too heavily in favour of Australian shares might expose your investment strategy to additional risks. Investors all around the world, and indeed here in Australia, tend to lean towards their home markets in their portfolios.
“Some investors may prefer the sense of comfort from investing in their familiar home market. This home bias, or familiarity bias, may appease a need for safety, yet create a less diverse and robust portfolio strategy.”
These investors lean towards the domestic markets because of the perceived lower risk of investing in familiar companies and household blue chip names we hear on the news daily. The concept of familiarity bias is related closely to the mere-exposure effect identified by Robert Zajonc, which states that repeated exposure to a stimulus leads individuals to develop a preference for it, simply because they are familiar with it.
In Australia, the bias can be rationalised by tax benefits like franking credits, which can make local investments more appealing. However, over-relying on domestic shares can lead to an unbalanced portfolio.
The Australian share market is divided into 11 sectors, following the Global Industry Classification Standard. These sectors include;
- Consumer Discretionary,
- Consumer Staples,
- Energy,
- Financials,
- Health Care,
- Industrials,
- Information Technology,
- Materials,
- Real Estate,
- Communication Services, and
- Utilities.
The market is considered concentrated because a significant portion is dominated by a few large sectors, particularly Financials and Materials, which together make up about 50% of the market capitalisation.
Additionally, the top 10 listed companies have historically accounted for around half the market capitalisation of the top 100 stocks, indicating a high level of concentration.
Australia’s market makes up only a small fraction of the global market. In 2023, global equity markets climbed to almost $109 trillion in total market capitalisation, of which Australia only represented a 1.5% share. By investing globally, Australian investors can tap into different sectors and markets, thus diversifying and balancing their portfolios.
- Mere Exposure Effect In Psychology: Biases & Heuristics, Simply Psychology
- ASX Sectors– Market Index
- Seven reasons why Australian shares are likely to outperform global shares, NABtrade
- The $109 Trillion Global Stock Market in One Chart, Visual Capitalist
At Stephan Independent Advisory, we understand the importance of striking a balance between domestic and international investments. We make sure to maintain a controlled home bias in our portfolios to prevent significant concentration risks. Typically, our clients’ portfolios are weighted more towards global equities than Australian equities, ensuring diverse market exposure.
Diversifying across countries is as essential as diversifying across companies. Since predicting which country will yield the highest returns is impossible, we believe in holding countries close to their market weights. This strategy helps capture returns globally and balances weaker performance in one market with stronger returns in another.
Can you pick next year’s winner? This graph indicates equity returns of developed markets each year for the past 20 years.
Through our rigorous Investment Committee meetings and constant scrutiny of our clients investment strategies, we make sure our clients’ portfolios have an effective weighting between Australian and Global shares. By acknowledging the psychological comfort our clients derive from holding domestic stocks and carefully assessing the associated risks, we attempt to recommend portfolios that meet their need for comfort and familiarity whilst ensuring financial stability.
