The average Australian investor is quite heavily focused on the top end of the Australian share market. Seemingly the people with the biggest portfolios, such as SMSFs, seem to be the most invested in the biggest ASX stocks.
Every investor should be aware of diversification for their portfolio. If investors are heavily invested in large cap stocks like Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Suncorp Group Ltd (ASX: SUN) then they're missing out.
It's much harder for big companies to double in value compared to small companies, which is why it's better to invest in small caps or mid caps. Australian companies are much more domestically focused compared to the biggest companies on other exchanges in North American and Europe. Domestic companies mostly miss out on global growth.
Some of the most exciting companies in the world in regards of profit growth are some of the biggest, such as the tech stocks like Alphabet (Google) Amazon and Facebook. For example, Facebook increased its profit by more than 50% in its report. Commonwealth Bank is lauded if it reports growth of more than 5% each year.
The Australian market only makes up between 1% to 2% of the global share market. I believe that to generate reasonable long-term investors need to get exposure to overseas equities.
Fund managers Platinum Asset Management Limited (ASX: PTM) and Magellan Financial Group Ltd (ASX: MFG) both run several internationally-focused funds that have demonstrated long-term outperformance. It's worth looking into some of these.
There are also several exchange-traded funds (ETFs) that own some of the best companies in the world as part of their top holdings. iShares S&P 500 ETF (ASX: IVV), Vanguard MSCI Index International Shares ETF (ASX: VGS), BETANASDAQ ETF UNITS (ASX: NDQ) and Betashares Global Cybersecurity ETF (ASX: HACK) all offer investors good ultra-long-term absolute returns.
Foolish takeaway
Australia has had an amazing run, but it becomes very dangerous to expect that run to continue forever, that's when expectations can bite an investor the hardest. The classic phrase 'past performance is not an indicator of future performance' is perfect for the Australian economy at the moment.
