A guide to investing in international markets

When it comes to investing, the world is your oyster. With Australia making up approximately 2% of the global share market, according to recent Statista data, there are plenty of investment opportunities to discover globally. Here’s why you might consider opening your portfolio to international investments.

Keeping it close to home?

Regardless of where you live, most investors carry an unconscious home bias. This means they invest the majority, or even all their money, into domestic shares. In Australia, investors allocate on average only about 21% of their portfolio to international shares. And according to a recent Morningstar survey, 54% of Australian investors don’t hold any international shares at all. Survey participants list various reasons, all of which come down to one thing: we’re just more comfortable with what we know.

The Morningstar July 2022 survey states:

•  29% of Aussie investors feel that they lack knowledge about international markets

•  20% are concerned about trading in a foreign currency

•  10% feel like they don’t know what to invest in

•  7% don’t know how to open their portfolio to global markets

To be clear: there’s nothing wrong with favouring your home turf. After all, there are benefits to investing back into your own economy. But it also means you could be missing out.

The benefits of investing internationally

Investing in overseas markets can help you diversify your investment portfolio. For example, should Australia see an economic slump, other global markets may still be on a high. So even though your Australian Securities Exchange (ASX) shares may take a hit, another stock exchange may remain profitable, thus balancing some of your losses.

Essentially, relying on one economy alone can make you and your investments more susceptible to market fluctuations, which can affect your overall investment strategy. For one, that’s because an economic downturn impacts the jobs and housing market, but it also affects the cost of living and the return on investment on your shares.

The key word here is diversification. That is, your goal is to diversify your portfolio to lower the overall risk without affecting your payout. The idea is to strategically choose asset classes (a category of investments) so that when some go down, others may go up (or at the very least remain stable).

What’s more, investing internationally opens industries up to you that may not be as well established in Australia. Take the healthcare, automobile, or tech industries, for example. Investing overseas gives you access to companies that aren’t on the ASX, too. Just think of Tesla, Apple, Microsoft or Amazon. Investing in global markets allows you to explore more investment opportunities - if that’s what you’re interested in.

Risks of investing internationally

Of course, diversifying your portfolio and investing internationally doesn’t eliminate all risks, as all investments carry risk. There are a few things to be aware of if you’re looking to take some of your money overseas.

By investing in overseas markets, you not only take on the economic fluctuations of that country, there’s a currency risk to think about, too. As international securities are denominated in a currency other than Australian dollars, the value of your investment may be affected by changes in currency exchange rates.

Tax implications might also be different from investing in Australia, and can vary depending on your individual circumstances and which countries you choose to trade. There’s a special form you will have to complete for US share trading, for instance, so you qualify for Australian tax treaty benefits.

Then there’s a certain amount of political and regulatory risk to consider. Just like in Australia, political and legislative changes may influence how you can invest your money as a foreign investor. The Australian market is also highly regulated and, while the overseas markets CommSec allows trading in are regulated too, it’s important to remember each market is regulated differently, with their own set of rules. Overseas, regulators have different standards and powers when it comes to intervening – specifically, when trading conditions deviate from the norm. Essentially, this means when there’s increased market volatility and fluctuation in share price, you could be exposed to larger losses.

ETFs also come with their own set of risks – for a deeper dive on ETFs and their risk and benefits, visit the CommSec Learn page here.

Navigating volatile markets

Both domestic and international investments are subject to market volatility. This means, your shares are likely to experience sudden ups and downs, regardless of where you put your money. The trick is to assess your investment goals and pair your strategy with your preferred level of risk, so you’re more comfortable riding out the low points.

How to get started with CommSec

Before you can get your hands on international shares, there are a few things you need to know. International trading often requires a separate trading account in addition to your domestic share trading account. At CommSec, this is called the International Share Trading Account. New customers also need to apply for a Commonwealth Direct Investment Account (CDIA) as their nominated settlement account.

CommSec Pocket also offers you access to ETFs from 100 of the biggest companies in the world, as well as hundreds of emerging international markets. As always, it’s important to thoroughly research any potential investment, to ensure you know exactly how you’re putting your money to work.

As always, it’s important to thoroughly research any potential investment, to ensure you know exactly how you’re putting your money to work.

Investing in global markets isn’t necessarily more or less risky than investing on home soil. It may just take a little longer to familiarise yourself with the specifics for the markets you’re interested in. Learn how to get started.