Are You Investing Too Much in Australian Shares?
Australian investors have always had plenty of reasons to invest close to home.
We know the companies. We understand the economy. We’ve got franking credits. And for a long time, investing overseas was more expensive and more complicated than it is today.
But in this episode of Financial Autonomy, I wanted to question whether the traditional preference for Australian shares still stacks up in the same way it once did.
Because a lot has changed.
Over the past decade, Australian and US shares have delivered very different returns. Many of the industries behind some of the world’s biggest companies have relatively little representation on the ASX. And investing internationally is now far easier than it was 20 years ago.
So rather than asking whether Australian shares are good or bad, I think the more useful question is: Does it still make sense for Australian investors to have such a strong home bias?
Are Australian shares still a good investment?
Australian shares still give investors access to some very strong businesses.
We have world-class miners, major banks, healthcare companies, insurers and infrastructure businesses. And there will certainly be periods when Australian shares outperform international markets.
The issue I explore in the episode is whether Australia should still occupy as large a place in portfolios as it traditionally has.
That’s a different question.
The Australian market reflects the strengths of the Australian economy. But it also means some sectors are much more heavily represented than others.
If you want exposure to areas such as artificial intelligence, cloud computing, advanced semiconductors, software, digital advertising or biotechnology, many of the biggest listed companies in those industries sit outside Australia.
Have international shares performed better than Australian shares?
Over the decade discussed in the episode, yes.
Australian shares, including dividends, returned around 8% a year.
US shares returned roughly 16% a year in Australian dollar terms.
To put that into dollars, $100,000 invested in the Australian market would have grown to around $220,000. The same amount invested in a broad US index would have grown to roughly $440,000.
Currency movements contributed to that difference, so it isn’t as simple as saying one market is better than the other.
And past performance obviously doesn’t tell us what happens next.
But when the difference has been that large, I think it is worth understanding what has driven it rather than assuming the traditional Australian allocation should remain unchanged forever.
Are Australian shares cheap compared with US shares?
This was one of the questions I was particularly interested in when putting the episode together.
After such a strong run from US shares, you might assume Australia must now look cheap by comparison.
The numbers were more complicated than that.
At the time of recording, the forward price-to-earnings ratio for the ASX 200 was 18.8. Three years earlier it was 16, five years earlier 16.5 and ten years earlier 15.
For the S&P 500, the forward PE ratio was 20.1, compared with 20 three years earlier, 22 five years earlier and 18 ten years earlier.
So despite the very different performance of the two markets, Australian shares hadn’t simply become the obvious bargain.
That’s a useful reminder that share prices on their own don’t tell you whether a market is expensive or cheap. You also need to consider what has happened to company earnings.
Should Australians invest in international shares?
International shares give investors access to companies, sectors and economies that aren’t well represented on the ASX.
That has always been true to some extent. What has changed is how easy it is to access them.
Twenty years ago, international investing could be expensive and cumbersome. Today, low-cost ETFs can give Australian investors exposure to thousands of companies across dozens of countries. Even mainstream brokerage platforms now make overseas investing relatively straightforward.
That removes one of the old practical arguments for keeping most of an investment portfolio at home.
It doesn’t mean every investor should suddenly increase their international exposure.
It does mean geography is less of a restriction than it once was.
Are franking credits worth investing in Australian shares for?
Franking credits are one of the strongest arguments in favour of Australian shares, particularly for some retirees and investors on lower tax rates.
They can improve after-tax returns and shouldn’t simply be ignored.
But in the episode I make the point that the tax benefit is only one part of the investment decision.
There are also questions around diversification, the types of companies you’re investing in and how much exposure you already have to the Australian economy.
For me, that’s the more useful way to think about franking credits.
They are a benefit of Australian shares, rather than a reason to stop considering everything else.
Are Australian investors already heavily exposed to Australia?
Potentially, and this is one of the parts of the discussion I think is easy to overlook.
For many Australians, their connection to the domestic economy goes well beyond their share portfolio.
Their salary may depend on the Australian economy. Their spending is affected by Australian inflation and the Australian dollar. And for homeowners, a significant part of their personal wealth may already be tied to Australian residential property.
That broader picture is worth remembering when thinking about diversification.
Owning international investments isn’t only a conversation about trying to achieve higher returns. It can also be about spreading exposure across more countries, industries and economies.
Is it better to invest in Australian or international shares?
I don’t think there is a useful one-size-fits-all answer to that question.
Australian and international shares offer different things.
Australian shares provide exposure to industries where Australia is particularly strong, along with benefits such as franking credits.
International markets provide access to a much broader range of companies, industries and economies.
The important point from the episode is that the reasons Australian investors historically had for maintaining a large home bias have changed.
International investing has become easier. The global sharemarket has grown in importance. And many of the companies driving growth in newer industries are based outside Australia.
So I think it is reasonable to question an Australian allocation that exists simply because that is the way portfolios have traditionally been built.
How much should I invest in Australian shares?
There isn’t a single percentage that will be appropriate for everyone.
The episode isn’t about coming up with a magic Australian-versus-international split.
It’s about questioning the assumption that Australian investors should automatically have a large proportion of their share investments at home.
Markets change. Investment access changes. Economies change.
And a portfolio decision that made perfect sense 20 years ago deserves to be reconsidered if the reasons behind it have changed.
That doesn’t mean Australian shares no longer matter. Far from it.
It means the conversation today is less about Australia or overseas and more about how Australian shares fit into a much larger global investment universe.
Wondering whether your investment mix still makes sense?
One of the hardest parts of investing is working out how all the pieces fit together.
Australian shares, international shares, super, property, tax and your other investments can all affect the bigger picture.
At Guidance Financial Services, we help clients understand how their investments fit with their goals and broader financial position, and work through the trade-offs involved in building an investment strategy. You can see more about how we invest your money here.
If you’d like personal advice on your own investment strategy, you can book an appointment with us here.
This article is for educational purposes only and does not take into account your individual circumstances. If you would like tailored advice, we can help you work through the numbers properly.
