By Mary Holm, independent financial writer. Article reprinted from Holm Truths with permission from Mary Holm.
Most New Zealanders hold more shares in local companies than in international companies, either directly or via managed funds.
But there’s a strong case to be made for the opposite – more international shares. And it can be summed up in one word: diversification.
Even if you own a wide range of New Zealand shares, there are many industries not represented on the NZ share market. Examples are car, pharmaceuticals and computer manufacturers.
And you are heavily exposed to a single economy, especially if you also own a home and hold a job in this country.
If disaster should befall New Zealand – such as a severe earthquake or a foot and mouth outbreak – the value of most local shares may plunge.
But if you hold shares in many countries and one suffers a disaster, it won’t greatly affect the total value of your savings.
Also, because one country’s boom can offset another country’s downturn, a diversified investment in international shares is usually less volatile than in NZ shares – despite recent atypical trends.
However, there are counter arguments.
NZ shares tend to pay higher dividends than foreign shares.
In theory, at least, that means that foreign companies retain more of their earnings to be used for expansion, and so their share prices are likely to grow more.
Still, retired people and others who want income from their investments will find receiving dividends is more convenient, cheaper and involves less risk than selling shares.
What’s more, New Zealand has dividend imputation, which means that investors don’t pay tax on dividends if the company has already paid tax on that money.
If you invest in overseas shares, you don’t benefit from imputation. This is not a big deal, however, because overseas dividends are usually small.
On the psychological front, many people are more comfortable investing in familiar local companies, about which they can easily get information – even if that knowledge doesn’t necessarily improve their chances of making money.
It’s also easier to invest directly in NZ shares, rather than using a managed fund, if that is your preference.
But you shouldn’t invest directly unless you have enough to go into at least 10 or 15 shares, and you will need to do more administration than if you use a fund. You will, however, save on fees and, in most cases, pay lower taxes.
Directly owning international shares is trickier. You pay more brokerage, and your taxes are more complex. Also, unless you have taken steps to prevent it, ownership of foreign shares can complicate matters after you die.
For these reasons, and also because it’s harder to research foreign markets, most people prefer to make their international share investments via a managed fund, probably based in New Zealand.
What about currency risk? Many people say that, if you invest offshore, you are adding to your risk. If the Kiwi dollar falls, your investment will gain, but the reverse will also happen.
This is simplistic. The prices of many of the things we buy – such as travel and imported goods –fluctuate with the value of our dollar.
If the Kiwi dollar drops, pushing up the prices of travel and cars, people with foreign investments are compensated because their investments grow faster. If our dollar rises, the reverse happens.
Far from adding to volatility, putting some money in international shares helps to smooth out the effect of currency fluctuations.
If you haven’t got any international shares, you may, in fact, be just as exposed to harm from currency fluctuations as those with all their investments offshore.
So which are better, NZ or international shares? It’s best to have some of both. And there’s a strong case for more than half your shareholdings to be international.
The views or information given in this article are not necessarily the views of AMP or AMP Adviser Businesses. It provides general financial information and is not intended to provide financial advice. For personalised financial advice, we recommend you contact us.