For some time, financial experts have debated the merits of investing exclusively in Australian shares. While these shares offer attractive dividends for Australian tax residents, growing capital through a portfolio solely consisting of Australian stocks presents significant challenges. This has become increasingly evident as investors observe the stagnation of their Australian share investments compared to the dynamic growth seen in international markets, particularly the United States.
One investor, who has long advocated for diversified portfolios, recently shared their experience of watching a segment of their portfolio, invested exclusively in Australian shares, remain stagnant. Despite the reliability of these shares for income generation, the growth trajectory has been notably underwhelming. This observation underscores a broader issue: the typical portfolio of Australian shares struggles to achieve the growth rates that justify the associated risks.
The Struggle for Growth in Australian Shares
Many Australian investors find themselves waiting for their portfolios to reach significant milestones, only to be met with disappointment. The typical collection of Australian shares, often composed of big names known for income generation, tends to underperform in terms of growth. While some smaller Australian companies do exhibit growth, the overall risk-adjusted return of many ASX-listed shares remains lower than desirable.
Vanguard’s 30-year asset class charts, released annually across various regions, including Australia, highlight this issue. The data consistently shows that investors who focus solely on Australian shares and property may not be maximizing their growth potential. This is particularly concerning for self-managed super funds (SMSFs) and mid-career professionals heavily invested in Australian dividend payers.
“The US shares have outperformed literally everything in literally every timeframe,” an industry expert noted, emphasizing the need for financial advisers to consider international markets.
Comparative Performance: Australian vs. US Markets
Comparing the performance of various indices over different timeframes reveals a stark contrast between Australian and US markets. Charts comparing the ASX 200, ASX mid-cap index, ASX small ordinaries, ASX 50, S&P 500, and Nasdaq 100 demonstrate that US indices have consistently outperformed their Australian counterparts in terms of growth.
Even when accounting for dividends, the disparity remains significant. The US market’s ability to deliver superior growth rates suggests that Australian investors might benefit from diversifying their portfolios to include international equities.
“The risk-adjusted return of too many ASX-shares is lower than it should be,” a financial analyst commented, pointing to the need for strategic diversification.
The Role of Super Funds and Global Exposure
Australian super funds, while investing globally, still maintain a heavy concentration of Australian equities. This allocation often results in underperformance compared to high-growth options available in the US. Despite Australia representing just 1.54% of the MSCI ACWI index, many super funds allocate a disproportionate amount to domestic equities.
A comparison of the performance of major Australian super funds’ high-growth options against the ASX 200, S&P 500, and Nasdaq 100 highlights this issue. The underperformance of these options underscores the importance of global diversification for achieving optimal growth.
Looking Forward: The Case for US Market Exposure
While Australian stocks offer excellent income opportunities, the global growth landscape is largely driven by US-based industries. Sectors such as media, finance, technology, entertainment, healthcare, and artificial intelligence are dominated by American companies. Although China is emerging as a competitor in areas like renewables and electric vehicles, the US remains a leader in innovation.
“The waves driving global growth and innovation are all based in the US,” a market strategist explained, highlighting the strategic advantage of US market exposure.
For investors seeking growth, particularly early-to-mid-career professionals, the US market offers unparalleled opportunities. While Australian dividend payers remain a solid choice for income, those aiming for growth should consider expanding their investment horizons to include US equities.
In conclusion, while Australian shares provide reliable income, the potential for growth is significantly enhanced by incorporating international investments, particularly from the US. As global markets continue to evolve, strategic diversification remains key to achieving financial goals.
