For many stock market investors and SMSFs exposed to financial markets, a sleeping problem is starting to creep onto the radar.
In the changing landscape of local market performance and concerns over global stability the question is now being asked - how much exposure to the Australian market should I have in my portfolios?
The current news headlines highlighting Greek markets illustrate the point perfectly.
If you asked a long term investor whether I should have all my assets invested in Greek stocks, the answer would be an overwhelming ‘no!’
This seems clear given the risks surrounding defaults and the precarious placement of their stalled economy.
When one also considers the increasing run on funds from the banking system, only a very speculative view point would agree that full investment makes sense there currently.
This, of course, is an extreme example and not a direct comparison to the average Aussie investor or SMSF.
The statistics don’t bear out that well when we look at the local market.
After 20 years of economic growth and stability, and the great returns that have come from a variety of sectors, the local investor may have become complacent.
The notion of diversification is investment theory 101, but is not being implemented with any gusto.
When looking at SMSF funds allocation in the 2012 “Intimate with Self-Managed Superannuation Report” over 50 per cent of funds were in Australian listed equities.
Second on the list was cash and property and only 1.4 per cent was in offshore investments.
A more telling statistic is that, of the large proportion invested in Australian shares, the bulk of those dollars were in 10 individual shares.
Think the big four banks, miners and other dividend plays like Telstra.
I would never suggest getting out of the Aussie market altogether, there is certainly a clear and strong case to be invested locally.
However, due to the concentration of funds and lack of diversification in the average SMSF portfolio the question has to be asked - how much risk is added?
When attempting to tackle the asset allocation puzzle most people stick with what they know, investing in property or shares in their own backyard.
All astute investors realise performance year on year changes and varies greatly between asset classes.
As cash, bonds, stock and property are the main asset class choices people look to, chasing next year’s higher returns based on this year’s performance is a strategy that can be challenging given that cycles occur and change constantly.
The best way to smooth the returns and balance the risk is to address the asset allocation question before you invest, as opposed to changing and chasing as volatility strikes.
However, it’s never too late to look at the mix of your investments. In coming articles I will look at the challenges and hurdles that stop people diversifying more offshore.
Until then you might consider what offshore investment percentage are you comfortable with, based on your stage of life and risk profile?
Finally you can then start to consider the opportunities in established markets like the United States and Europe, or even emerging markets that may have better performance outlooks than we are seeing locally.
The good news is we can use a number of investment vehicles to achieve this, and be in individual stocks or even broad based exchange traded funds but more on that in coming weeks.
Aaron Lynch is a Market Analyst with optionsXpress Australia by Charles Schwab. optionsXpress Australia is a pioneer in online stock, options and futures brokerage service to the self-directed investor.