September is the season when biases of the sporting kind are given full rein as the respective winter football codes gear up for the season-defining grand finals.
But while our sporting biases are openly celebrated (or commiserated with) our biases as investors are often less well-defined or understood.
A good investor trivia question is to ask how much home country bias resides within your portfolio?
Some level of home country bias – which is how much of your portfolio is invested in Australian assets versus international markets – makes complete sense. As an investor building wealth, paying taxes and in retirement using superannuation and other investments to buy (mainly) Australian goods and services to provide a lifestyle it is not just sensible but essential to be aligned with local market values
Looking around the world investors in developed economies all exhibit – to greater or lesser extent – home country bias.
But like most things in investing it comes down to a question of balance – and in the current market perhaps a discussion around where Australia sits versus the rest of the world.
The good news is that Australia escaped the worst of the global financial crisis and is enjoying economic growth at a rate the rest of the developed world can only be envious of.
We should all be thankful for our resources and the burgeoning demand from developing nations like China. When combined with a strong banking and financial sector you have the two ingredients required to emerge relatively unscathed from the worst financial crisis in 70 years.
And as human beings our default wiring according to several behavioural finance studies is to assume today’s good times will continue to roll.
But there are no guarantees and from an investment portfolio perspective the Australian economy looks like a concentrated bet. Economies – like investment markets – can be in or out of favor at various times. The same things that are driving growth today were being derided in the late 1990s, early 2000 technology boom. Remember the derogatory labels being handed out back then – Australia was an “old” economy being left behind by the technology age.
That period of overt negative sentiment certainly didn’t play out the way the pundits expected but perhaps that should also make us cautious about times of rampant optimism.
When you consider performance numbers it is easy to understand why Australian investors look at international share markets and question why they would bother.
Looking at the returns of the MSCI World ex-Australia sharemarket index on an unhedged currency basis the return over seven years to end of July 2010 is a paltry 0.30%. ake away the currency movement and it is a more respectable 5.8% bt investors are entitled to ask why not stay at home with the Australian market delivering 9.8% oer the same seven-year period.
It comes back to two well-worn arguments. One is that what happened in the past is not a reliable predictor of the future and two being the benefits of diversification in terms of managing risk.
Being biased towards our home country is a sensible thing on many levels but not if it makes us blind to the inevitable shifts in economic and market cycles and opportunities to diversify risk.
* Written by Robin Bowerman, Head of Retail at Vanguard Investments Australia.
To receive this column by email each week, register with Smart Investing™.
No comments:
Post a Comment