Go Global for Diversification that Travels Well

Australian investors may believe they know Australia best. Accordingly, they are liable to put the bulk of their investments in stocks and bonds of Australia-based companies and in Australian government fixed interest securities. Yet this strategy has some holes. “Home bias” can limit your investment opportunities and constrain your ability to benefit from diversification.¹

Consider these revealing numbers:

• Stocks of the roughly 21,150 companies trading outside Australia represent around 98% of the world’s $152 trillion equity market (see Exhibit 1).

When Australians invest outside Australia, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere. Returns in 2024 offer a useful example of this phenomenon: The Australian stock market grew 12%, but non-Australian developed markets like the UK (19%) and US (37%) performed much better.² Similarly, in fixed interest markets, both yields and total returns typically vary across the globe and often do not move in lockstep, which is no surprise. Bonds issued in different countries and currencies can offer a range of yields and expected returns.

A country’s size, population or gross domestic product doesn’t necessarily tell us much about the investment opportunities in that country. Japan, for instance, is relatively small in landmass but accounts for 5% of the world’s equity market value—representing over 2,400 companies, including familiar names like Toyota and Sony—as well as 10% of the investment-grade bond market. Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms.

By looking outside their home market, investors can expand their choices and opportunities for higher expected returns. A global approach can also enhance diversification, which may help reduce portfolio risk and volatility. This isn’t guaranteed to produce strong returns every year, but it can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals.