Let’s dare to be different
Australian investors favour Australian stocks, but there’s a big world out there
In last month’s issue, we trawled the universe of exchange traded funds (ETFs), looking for the best option for Australian investors. We went with the BetaShares Nasdaq 100 ETF, adding much-needed industry, currency and geographic diversification to what, for most of us, are Australia-centric portfolios. In that article, I wrote: “Sure, you could open a brokerage account to buy overseas companies (more on that next month), but an ASX-listed ETF, focusing overseas, can be a great option for many.”
And, true to my word, we’re going to expand on that theme.
Maybe you know the stats. But just in case, would it surprise you to know that Australia represents less than 2% of both global GDP and the world’s stockmarkets?
Yes, we punch above our weight in some areas – mining, health technology and winged keels, in particular – and per head of population we do well. But overall our economy is smaller than California’s.
This isn’t anything to be ashamed of, but it certainly is something worth knowing.
Let’s try a thought experiment. What if I told you that there were around 1800 equities listed on the ASX? But what if I said you could only invest in 35 of them, chosen by me, and based on some arbitrary criteria. Maybe based on the first letter of the company’s name. Or CEOs called John. Or the colour of their logo.
You’d rightly think I was nuts, right? What if I said, “You can only invest in one single stock exchange, that’s around 2% of the global total … and that exchange is in India”? Again, nuts. One stock exchange? In one country? That makes up a tiny fraction of the world’s bourses? Who’d sign up for that?
Except that’s what the overwhelming majority of us do in Australia (India’s stockmarket is bigger, by value, than ours, by the way). “But, but, but…”, you splutter. “Australia is more reliable. And we know the companies better.”
Maybe. But are you so sure the Australian stockmarket will perform better than, say, India’s, England’s or the US’s? And if you’re not, why would you let yourself be tied down to just one exchange?
I could also mention that the ASX is overwhelmingly (and unhealthily) dominated by finance companies and miners. Or that the top 20 companies make up nearly two-thirds of the market. But by now either you’ve accepted my point or I’m flogging a dead horse.
I ask you, though: what are the odds that my 35 arbitrarily chosen ASX companies beat the rest? And if that question really is as silly as it seems, why would you limit yourself to just the ASX, other than because of inertia, uncertainty or fear.
On the assumption that I’ve made my case and you accept that it’s possible, even probable, that there are some better companies out there, which should you choose? I’m glad you asked!
Scott Phillips is The Motley Fool’s chief investment officer. He owns shares in Amazon, Alphabet and Berkshire Hathaway. You can reach him on Twitter @TMFScottP and via email ScottTheFool@gmail.com. This article contains general investment advice only (under AFSL 400691).