Returns from the tech-focused Nasdaq have frequently been impressive. Photo / Hapabapa, Getty Images
Andrew Ford is a Wealth Management Adviser at Jarden in Auckland.
OPINION
When it comes to investing, it’s natural to start locally. Familiarity with a company, whether from being a customer, witnessing its growth, or sensing its potential can serve as a solid foundation for your research.
Investing in New Zealand also keeps things simple from an administration perspective, and you can feel good about supporting Kiwi businesses and the local economy.
However, many investors look to invest globally for higher returns. That has proven rewarding - the All-Country World Index has returned 12.2% a year for the past decade in NZD, compared to 9.0% for the NZX50 gross index.
Returns from the tech-focused Nasdaq have been even greater, with the index delivering 17.3% per annum over the past 10 years.
While the greater returns are an important factor, it is not the primary reason New Zealand investors should seek global exposure.
More importantly, the consideration of investing offshore is the reduction in risk achieved through diversification. In this case, rather than a company-specific risk, it is mitigating the possibility of an event that could impact the New Zealand economy.
Without diminishing the human and social impact, a natural disaster can also have a massive economic fallout, and nothing can change the fact that we live in a country on a fault line.
A major event could lead to significant economic fallout, hence the benefit of diversifying offshore.
Other potential risks include infrastructure failures, or a biosecurity threat, such as foot-and-mouth disease, which could devastate our dairy industry, exports, and the wider economy.
The fallout from a shock of this nature could have a large adverse impact on asset values, including the sharemarket, and the NZD.
It is also worth looking at your overall position. You likely already have exposure to New Zealand through property, savings, other investments and income.
Along with reducing concentration to local assets, global equity markets offer a broader range of sectors that may not be accessible through the NZX.
For example, information technology is the largest sector of the S&P500, making up 31.7% of the index.
Whereas the NZX is dominated by utilities, health care companies (F&P Healthcare and retirement village operators) and industrials, with companies in the info tech sector representing just 2.6% of the benchmark.
Global markets also benefit from much greater liquidity, making it easier to buy and sell shares.
So, what should I invest in?
A low-cost index fund providing diversified exposure is one way to start.
For direct investments, investors tend to gravitate toward well-known companies.
According to Sharesight, a portfolio tracking platform, the most traded global stocks in September 2024 included Nvidia, Microsoft, Tesla, Apple, and Alphabet (Google’s parent company).
Investing in familiar names doesn’t always guarantee success, and while it would have worked well with companies like Apple and Microsoft, you may have stuck with Disney, Nike or Intel, which have all halved in value over the past three years.
Conversely, strong performers like Nvidia, Eli Lilly, and Advanced Micro Devices may have flown under your radar before gaining global attention.
The KiwiSaver Annual Report produced by the Financial Markets Authority shows 39.4% of funds are invested in international equities, compared to 15.7% invested in Australasian equities.
However, investing in overseas markets does create some additional complexity, such as how to hold the assets, currency risk and tax considerations under the Foreign Investment Fund rules, therefore seeking financial and taxation advice is necessary.
While investing globally may seem to divert support from local companies, it also contributes to improving New Zealand’s international investment position, which as of March 31, 2024 stood at a negative $199 billion.
Not only does incorporating global exposure into your investment strategy diversify your assets, but it also reduces the financial impacts of a local shock, and can generate superior long-term returns.
Jarden Wealth Limited is an NZX Advisory firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at https://www.jarden.co.nz/disclaimers/wealth-management.
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