Future Focus: Should you be overweight Australian or international equities?
How to lean on professional insights to develop your asset allocation framework.
I recently wrote an article about how to build a portfolio with 3 ETFs. It was based on a concept from John Bogle as a simple way for investors to structure their portfolio. I outlined some choices for international, domestic and fixed income exposure.
Building a portfolio is often framed as a search for the ‘best’ investment. Investors spend a lot of time debating whether Australian shares will outperform international shares, whether technology stocks are too expensive, or whether it is finally time for bonds to make a comeback.
More important to your outcomes than selecting the right securities is deciding how your portfolio is allocated across different asset classes.
This is your asset allocation – the split between growth assets, such as shares, and defensive assets, such as cash or bonds. This matters because this decision will drive the majority of your long-term returns.
Central to this decision is not chasing what’s likely to perform best over the next year. It is about building a portfolio that gives you the highest chance of reaching your financial goals. Here, we lean on insights developed by teams of professional investors and researchers to develop your asset allocation approach.
Your required rate of return
Before deciding on an allocation, you need to go through the portfolio construction process. You need to start by understanding what you are trying to achieve. Once you have a clearly defined goal you can determine the return your portfolio needs to generate.
An example is an investor that wants $500,000 in 20 years.
Your required rate of return to get to the above goal is 5.8% per annum. This required rate of return becomes the anchor for your portfolio decisions.
From there, there are multiple ways to construct a portfolio that’s capable of achieving that target. This is where you can lean on professional insights to help form your asset allocation, and how to reach your goals.
Invest in a multi-asset fund
The simplest option available is to invest in a multi-asset fund that is looking to achieve the same required return as your portfolio.
There are a few factors to be aware of for this option. These are actively managed products where you are relying on a professional manager to successfully achieve the fund’s mandate. These funds typically also come with higher costs, as they are actively managed across many asset classes.
Multi-asset funds are available through fund managers such as Morningstar, Vanguard and Blackrock.
Morningstar’s multi-asset options include a Growth option. It looks to achieve a CPI + 3.5% return over the long term. It includes 70% exposure to growth assets. This fund objective is slightly above the 5.8% return required for the example portfolio.
Using multi-asset models to guide your allocation
The second option is leaning on these professional portfolios as a guide for where to place assets. It is one step further than understanding that you need a 70% allocation to growth assets. Which growth assets? In what split?
Below is the asset allocation split for Morningstar’s Growth portfolio.
There are several segments to this pie chart. As an individual investor, you do not need to own them all. Doing so can overcomplicate your portfolio and drive costs up, actively reducing your net return. Use it as guidance. A 30% allocation to Australian equities, a 40% allocation to global equities and 30% to fixed income may be a simplified allocation derived from the professional portfolio.
Capital market assumptions
The last method is the most involved. The two methods mentioned prior are portfolios based on underlying research that matches asset allocation to the objective of each portfolio. The output of this research is a set of capital market assumptions. Large investment firms publish forecasts for expected returns across different asset classes. These models attempt to estimate what future returns may look like for different asset classes.
I tend to place more weight on these forward-looking assumptions because they consider current market and economic conditions, rather than simply relying on historical averages. Markets evolve, interest rates change and valuations move. Looking only at the past can sometimes create unrealistic expectations about the future.
Morningstar’s capital market assumptions for the next 20 years are below. Investors choosing this option could use this as guidance to choose their asset allocation.
Source: Morningstar Investment Management, projected return by asset class.
There is not just one way to get there. You could decide to invest entirely in international shares or entirely in Australian listed property if you believe those allocations align with your objectives and risk tolerance.
What matters most is not the specific path you choose, but whether your portfolio is aligned with your goals and whether you can stick with it over time. It should reflect a balance of risk and return, which for me includes diversification across asset classes.
My own portfolio reflects this philosophy.
I invest primarily in Australian and international equities, and I currently do not hold fixed income. Within equities, I tilt more heavily towards international shares.
That decision is not based on trying to predict whether global markets will outperform Australia in the short term. Instead, it reflects the broader exposure I already have to the Australian economy.
I work in financial services in Australia, with my job heavily reliant on the local market. I have a mortgage with an Australian bank and significant exposure to the Australian property market. My salary is paid in Australian dollars. A large portion of my financial life is already concentrated in Australia.
International equities provide diversification away from the risks tied to one country and one economy.
I also think about the characteristics of the Australian share market itself. Australia has a relatively high concentration of mature companies that pay strong income distributions. One benefit for Australian investors is franking credits, which can make these dividends more tax-effective.
Regular distributions can also create recurring tax consequences throughout an investor’s journey. International markets, by comparison, often have greater exposure to growth-oriented businesses that retain earnings and reinvest them back into the company.
These differences influence how I structure my portfolio.
Importantly, I am not trying to determine whether Australian or international shares will ‘win’. That framing can distract investors from what actually matters. Investing is not a competition against another market or another investor. Success comes from building a portfolio that achieves the return you need to meet your goals.
If your portfolio gets you where you need to go, you are a successful investor.
That is why investing should never be treated as a static exercise. Building a portfolio is only the beginning. Investors need to stay engaged and monitor their progress over time.
That does not mean reacting to every market movement or changing your strategy whenever headlines become uncomfortable. It means reviewing your portfolio periodically, perhaps annually, and asking whether you are still on track to achieve the return your goals require.
Your circumstances may change. Markets will certainly change. The purpose of your portfolio should remain constant. It is there to help you build the life you want. Your asset allocation should reflect this and not trying to seek the best return at every corner.
Final thoughts
Going through this exercise will undoubtedly align your super closer to your retirement goals. Any adjustments made will ensure that you are taking the right amount of risk – be it a higher or lower amount.
Invest Your Way
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