Home is not where the returns are
Despite Australia representing only 2 per cent of the world's gross domestic product, Australian self-managed superannuation fund investors on average have almost 70 per cent of their investment portfolios in Australian-focused assets.
Australians' love affair with local shares is one of the strongest in the world. This can partially be explained by the favourable franking imputation credits, which are particularly beneficial for investors in a low tax environment.
Despite this, there are many reasons why Australian investors should consider lessening the home bias, not least because of the lack of diversification this represents within their portfolio.
The Australian market is concentrated mostly around banks and mining companies, with the financials and materials sectors accounting for more than 55 per cent of the largest 300 companies listed on the ASX.
Further, many Australians' largest investment exposure is property. The property market is tied to the banking sector, given the large concentration of retail bank assets held within mortgages.
This factor further reduces the diversification of portfolios with large exposures to both Australian property and the financial sector.
Offshore investments offer opportunities available overseas that are simply not able to be accessed through our domestic marketplace.
An example of this is the technology sector, which accounts for less than 1 per cent of the ASX 300. Globally this sector has provided incredible growth, a trajectory that will have been missed by Australian investors adopting a purely domestic portfolio of equities.
Many developed markets continue to find themselves in a prolonged bull market, buoyed by record low interest rates and an increasing appetite to take risk.
Australia is one of these markets, with equity investors enjoying years of stellar returns.
With this in mind, it is vital that investors continue to explore opportunities abroad in regions such as Asia and emerging markets, where valuations appear more favourable on both absolute and relative terms.
Until recently the Australian dollar/US dollar exchange rate has been tightly range bound, until the Australian dollar broke through the $0.80 barrier. The surge in the Australian dollar reemphasises the need to look at deploying capital offshore while the dollar is strong.
While currency markets are notoriously hard to predict, many analysts believe the recent levels the Australian dollar has been trading at is unstainable over the long term.
The Australian dollar's strength paired with recent US Federal Reserve meeting minutes pointing to more interest rate rises and increasing strength in the US economy, reinforces the argument Australians should be looking to expand their portfolios offshore.
However, with any opportunities it is important to consider the risks and whether it's right for you.