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By Mike Taylor, Pie Funds
If your investments are clustered only in this part of the world, perhaps it’s time to consider diversifying into global markets.
Beating the drum on diversification is nothing new. But as investors, we are often swayed by Mark Twain’s quote: to “put all your eggs in one basket and watch that basket”. In fact, many an entrepreneur will tell you that the key to success is that they were “all-in”, they didn’t diversify, and instead bet everything on themselves.
Given that most of us aren’t entrepreneurs and we don’t have the risk profile of a Richard Branson or the late Steve Jobs, then what should we do with our investments?
Certainly betting the farm on one investment is a recipe for disaster. Many farmers have come unstuck over the years, as keen salesmen have lured them into a high-risk investment with the promise of a guaranteed return, only to be left remortgaging the farm when the investment goes sour and the salesman disappears.
Plan A or Plan B?
First, I want to distinguish between investing in yourself as an entrepreneur or investing your savings to grow your wealth as an employee or retiree. If you fall into the first camp, then the only thing I can suggest is to make sure you have a plan B; and if you’re lucky enough to take profits out of your company, read on.
For the rest of us, diversifying your investment portfolio is probably investment 101. Even in the moment of pure greed, when the salesman comes knocking, I’m sure deep down you know you shouldn’t be putting all your eggs in one basket.
Local or international investment?
We can probably all agree that as investors we should diversify. But many of us are unsure about whether we should diversify our investments locally, or internationally.
After all, we know our own backyard. If it’s a rental property, we are probably familiar with the area and can obviously view the house. If it’s a bond, then we likely know the issuer. And if it’s a stock, such as Auckland Airport, we certainly know the asset.
So why invest beyond Aotearoa? Because it sounds sexy? Or maybe so we can show off and tell our neighbours that we own a hedge fund that bought US real estate after the global financial crisis. Ultimately, those are not good enough reasons to invest offshore.
A great reason to invest offshore is that you expose yourself to different economies, different markets, and different trends. New Zealand, love it though we all do, is a nation of 4.5 million people out of a global population of 7 billion. We’re at the ends of the earth andabout as tiny and isolated as you can get.
Have you considered the risks within New Zealand?
Overseas buyers, searching for yield, have bid up the New Zealand Stock Exchange (NZX) in the past few years, making it the best-performing (and most expensive) market in the developed world. Foreign ownership of the NZX has risen from 33 per cent to close to 50 per cent. These investors are what we call ‘hot money’. But what if interest rates rise and the hot money leaves?
Or what happens if net migration, a key driver of property prices, turns sharply negative? How about if New Zealand has another earthquake? Or an outbreak of foot-and-mouth disease decimates the dairy industry? It’s scary stuff, but those are all realistic scenarios.
Lessons from Brexit
The best way I can show you the effect these situations might have on New Zealand investors is Brexit.
After Brexit, UK domestic shares fell, demand for property weakened, and the pound collapsed. But if you had an internationally diversified portfolio, then the value of your overseas investments would have risen, due to the weaker pound. Overseas markets recovered more quickly from Brexit too, whereas in Britain, the effect has been longer-lasting.
Coming back closer to home, some of the things you can do to mitigate the risk of being 100 per cent exposed to NZ Inc. are:
• investing offshore when the New Zealand dollar is strong
• diversifying your property investments (at least outside of Auckland)
• buying overseas bonds.
How much should you diversify?
Some investment managers recommend having two-thirds of an investment portfolio invested outside New Zealand. Indeed, one of the country’s largest fund managers, NZ Super Fund, has 84 per cent invested offshore, despite a bias to support local businesses.
Personally, I believe that you will always know your home market best. So a large proportion of your portfolio should be invested locally – and I include Australia in ‘locally’. However, an allocation to overseas investments is a good way to diversify your portfolio and help limit the effect of extreme events that might hit New Zealand.
Consider the options
I was reminded recently, when discussing how to pick stocks, that there are many ways to skin a cat. You may have an approach to investing that works for you, which might include only owning New Zealand property. But, as Warren Buffett says, “diversification is protection against ignorance”.
If you don’t own any investments outside New Zealand, then perhaps now is a good time to go about it. If you don’t know where to start, then talk to your bank or investment adviser.
Disclaimer: Mike Taylor is the portfolio manager for Pie Global, Pie Growth and Pie Growth UK & Europe.
The opinions expressed by Mike Taylor in this article are his own and not those of Pie Funds and should not be attributed to Pie Funds.