Balancing Australian and global shares means weighing growth, income & currency risk
Getting investment exposure to global companies through share markets makes sense, but weighing up risks such as currency fluctuations is important.
Many Australians have a justified love affair with the domestic share market.
The Australian share market has delivered solid long‑term returns for investors, underpinned by strong performance across sectors such as financials and resources. However as part of a diversified portfolio and to minimise risk, investors could also look to global shares.
Yes, the ASX offers a strong mix of well-established companies, but international shares open the door to world-leading businesses that are not represented locally. By holding diversified, index‑based portfolios that include both Australian and international shares, investors can participate in the growth of global markets without needing to pick winners.
Aussie, Aussie, Aussie
First, let’s consider the strengths of Australian shares. Many investors value Australia’s dividend imputation system, which provides eligible investors with franking credits and can potentially improve tax efficiency.
Another major benefit of investing through the ASX is income generation, with Australian companies having a strong history of paying dividends. For investors seeking regular income, including retirees, this can be a real plus.
On the flip side, the ASX’s heavy focus on mining and commodities can mean that your portfolio is top heavy in the resources sector, creating potential volatility. It is worth remembering, too, that Australian-listed companies by total market capitalisation represent only about 2% by value of the global equities market.
Global bang for buck
International shares can complement your Australian investments, providing exposure to the big tech, consumer and healthcare giants.
For example, markets such as the S&P 500 in the United States feature tech stocks such as Apple, Nvidia and Amazon, global leaders that have served investors well in the past decade or so.
One of the key benefits of getting a mix of Australian and international shares is diversification. Spreading your investments across multiple regions, industries and companies can mitigate risks associated with reliance on any single market or economy.
There is no single ‘right’ mix
What percentage of Australian shares should you have versus global stocks? That is a discussion for you and us, and any decision should be based on your risk profile and long-term investment goals.
In practice, many diversified portfolios include exposure to both Australian and international shares. For example, Vanguard’s Diversified All Growth Index ETF allocates around 60% to international shares and 40% to Australian shares, illustrating how diversified investment options can spread exposure across global and domestic markets. Other investors may choose to hold different allocations depending on their individual circumstances.
Managing currency risk
You will have to navigate some specific risks with international investments, such as currency fluctuations. The value of overseas investments can rise or fall due to exchange rate movements, regardless of the underlying investment performance. While a weakening Australian dollar can boost overseas returns, a stronger dollar can erode them.
Some investors choose currency-hedged investment options to manage this risk. Currency hedging involves using financial contracts to reduce the impact of exchange‑rate movements on international investments.
Hedged options typically come with slightly higher costs, reflecting the additional management involved, but they can help smooth returns. Whether hedging is appropriate depends on your risk tolerance, time horizon and overall portfolio — something many investors choose to consider when they meet with us to discuss their portfolio.
All investing is subject to risk, including the possible loss of the money you invest.
Actual results could differ materially from those referred to in the article statements. In particular, distributions and capital growth are not guaranteed. An investment in shares is subject to investment and other known and unknown risks, some of which are beyond the control of Vanguard, including possible delays in repayment and loss of income and principal invested. Neither Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) nor its related entities, directors or officers give any guarantee as to the success of investments, amount or timing of distributions, capital growth or taxation consequences of investing in equities.
Source: Vanguard
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