Australian investors, as a whole, tend to put most or even all of their share market investing funds into ASX shares. While, as I'll outline below, this is generally a mistake, there are good reasons for that.
After all, most Aussies are more familiar with Qantas Airways Limited (ASX: QAN) than with United Airlines Holdings Inc (NASDAQ: UAL). And we're certainly better acquainted with Woolworths Group Ltd (ASX: WOW) than US supermarket giant Kroger Co (NYSE: KR).
Superficially it makes sense to invest in a company you know, and one you may well do business with yourself. Which is another reason Australian investors' portfolios tend to be overweight on ASX shares. With a small, geographically isolated population, we like to support the home team.
Additionally, investing in international shares was historically more difficult and expensive than buying shares on the ASX. And many investors don't realise that the last few years have ushered in a sea change here.
Almost every Australian broker and numerous online trading platforms now enable you to buy US and other internationally listed shares. And the fees are not much higher than they charge for investing in ASX shares.
Some annual share market returns
Let's look at some share market returns to give you an idea of why sticking solely to ASX shares likely isn't in your best interests.
We'll start here at home with the S&P/ASX 200 Index (ASX: XJO), which contains the 200 largest Australian listed companies by market cap. The 1-year returns for the ASX 200 stand at -5.1%. That's after the index was up 11.2% from 26 August 2019 through to 20 February this year.
We have COVID-19 to thank for that. But then the coronavirus is a global pandemic and has plagued share markets without heed for international borders. And the United States, certainly, hasn't been spared.
So how have the 2 major US indexes done?
The S&P 500 Index (INDEXSP: .INX) is up 19.6% over the past 12 months. And the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) has gained 46% in the past year. I'm sure you'd rather have a piece of those gains than the 5.1% loss from the ASX 200.
Some great Aussie shares
Now before the hate mail pours in, there are some fantastic shares on the ASX. Some have delivered eye-popping gains despite being dragged lower during the viral selloff in February and March.
The Afterpay Ltd (ASX: APT) share price leads the ASX 200 pack, with shares in the buy now, pay later company up 277% over the past 12 months,
Mesoblast limited (ASX: MSB) comes in a close second. Mesoblast's share price has gained 261% over the past full year.
In fact, 6 ASX 200 shares have delivered share price gains of 100% or more over the past 12 months. That's 6 companies that have doubled, or more, their investors' money in just one year.
So by all means, do invest in ASX shares. But in my opinion, it's worth also looking to invest some of your money beyond our fair shores.
Own a piece of the businesses the world uses every day
We'll get back to the potential to boost your gains by investing internationally in a tick. But first you should be aware of the additional potential risks. And, of course, that there's no guarantee you'll achieve bigger gains by investing some of your money outside the ASX.
One thing to be aware of is fluctuations in the exchange rates. If the Aussie dollar gains against the US dollar, your returns will be less if you sell your US shares. On the other hand, if the Aussie dollar falls against the greenback, it would see your gains increase.
There are also some tax issues to keep in mind, including the fact the dividends on US shares won't come with franking credits.
With that said, there are a number of good reasons not to park your entire share portfolio in ASX shares, beyond the potential to boost your share market gains.
Like diversification.
The Motley Fool's own Scott Phillips sums it up perfectly:
By investing part of your funds internationally you not only increase the opportunity to find the big winners of tomorrow, but you also reduce the risks that are specific to Australia. Risks that could seriously damage your portfolio.
Scott is talking about risks such China closing its doors to our mineral or wine exports.
Here's more from Scott:
Some of the very best companies on planet Earth aren't listed on the ASX. The Australian share market is a minnow on the global stage. Our share market represents a tiny 2% of global stock markets. … If you're anything like the average Australian, it's a very fair bet that more than 75% of the products and services you come across each week are owned by US-listed firms.
That's a startling statistic, but if you're like me it certainly holds true. Which is why Scott says, "[p]erhaps the single biggest reason to invest internationally is to own a piece of businesses whose products and services we and many others around the world use on a daily basis."
So how does this advice pan out in real life?
Over at his investment advisory, Share Advisor, Scott Phillips recommends both ASX and US-listed shares. And he's racked up an admirable track record in both.
Going back all the way to 2011, Scott's ASX recommendations in Share Advisor have returned an average of 47.9%. That beats the benchmark by a handy 18.0%.
Scott's also been recommending US stocks in Share Advisor since 2011. The average return there is 203.6%, beating the benchmark by 165.2%.
Have another look at the numbers above. I believe they speak for themselves.
