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3. How to invest in international markets?

2. Why invest in international markets?

Investing in international markets provides the opportunity for diversification and gives you the ability to access some of the world's most recognisable and loved companies.

In summary

International shares offer the chance to increase your portfolio’s diversification
Geographic diversification offers more variety than just sector diversity
You can gain access to some of the world’s most well-known companies
Some sectors overseas are much more developed than in Australia. International share trading provides the opportunity to trade in these shares

Diversification

The more variety in your portfolio, the less exposure it will have to any one particular risk. So, investing in international markets increases your diversification.

Adding international shares gives your portfolio a global perspective; it’s not just about the company you invest in—you might also gain exposure to the home country too. Buy enough shares from say Italy, and your portfolio may add that country’s characteristics to its overall performance.

Access

Not only is the Australian share market relatively small, but it tends to be dominated by financial and mining companies. International share markets can give you access to sectors that are under-represented in Australia—or not represented at all. For example, the U.S. stock exchanges can offer exposure to the pharmaceutical, aerospace and artificial intelligence sectors, as well as technology stocks. The Australian share market might offer some exposure to these sectors, but they are better represented in the U.S.

Market cap data is from Statista. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes only.

Before you jump in

Take some time to evaluate where you’re at in life. Is your career just getting started or are you in a stable position? Whether you’re earning a little or a lot, the first step is knowing what you truly want from your investment and if your financial position allows you to set something aside for investing.

Before you start investing, you might want to work out how much you’ll be able to set aside each month, and how much risk you’re willing to take on. High-risk investments have the potential to yield a high return, but the risk of making a loss is also greater. Low-risk investments may yield a smaller return but tend to offer more stability.

Another thing to consider is your age. While you can start investing at any point (provided you’re over the age of 18), the longer your money is invested the more likely you’ll be able to withstand the ups and downs of the share markets.

Set your goals

Your investing strategy will also depend on your goals and your risk appetite. Setting your eyes on the prize not only gives you something to strive for, but also helps to keep you accountable – so long as you stay realistic.

Short-term goals, like a trip overseas can take anywhere from a few months to a couple of years to achieve. This could mean you may be required to sell when the conditions are unfavourable. Lower-risk investment options, like cash, bonds and some Exchange Traded Funds (ETFs), could be solutions to minimise risk.

Case study: Diversification

Jack’s worried about the Australian economy and its reliance on commodity prices. Every time the price of iron ore drops, his portfolio of Australian shares goes down. Lower commodity prices might be terrible for Australia, but surely some countries might benefit from cheaper raw materials?

Jack thinks, if the price of iron ore goes down steel might get cheaper. A big manufacturing country like Germany should benefit, right? They could produce more cars made of cheaper metals at a higher profit margin if the price of iron ore drops.

So, Jack adds some German shares to his portfolio. They tend to move in the opposite direction to some of his Australian shares which are more linked to the price of iron ore. This is good, because when the iron ore price declines, he might see his German shares appreciate, cushioning the impact it has on his Aussie stocks.

Case study: Indexing

Jill loves technology and investing, but the biggest names are listed overseas, usually on the U.S.’s NASDAQ. She’d love to buy some shares in her favourite companies, but she doesn’t know if she can handle the high risk that comes with investing in technology. She really doesn’t want to miss out though.

An ETF that invests specifically in shares on the NASDAQ could be a great solution. The Invesco QQQ ETF trades on the U.S. markets and invests in the NASDAQ 100 index which includes a number of her favourite tech companies, like Tesla, Apple and Microsoft.

Broad-based ETFs tracking an index are highly diversified, so she doesn’t have to worry about each individual share. If companies listed on the NASDAQ perform, so too will her ETF investment. Not everyone has the time and money to research and buy a whole range of international shares. Using passive investing strategies, such as ETFs, is a great way to cost effectively add international exposure to your portfolio. Learn more about ETFs and how they work.

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Disclaimer

CommSec Learn is intended to provide general information of an educational nature only. Investing in overseas markets exposes you to risks including those related to movements in foreign currency exchange rates and market prices. The information has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice. You can view the product Terms and Conditions, Product Disclosure Statement, Best Execution Statement, Financial Services Guide and should consider them before making any decision about these products and services. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

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