The historical benefit of low-cost index investing in Australian shares covered by the ASX 200 (INDEXASX: XJO) is obvious.
If you have an internet connection you can access the SPIVA website to see that over five years most (79%+) active fund managers have performed worse than the ASX 200 index.
Call me crazy but I think it’s now more important than ever to start looking at other strategies, investment classes and geographies to diversify an Australian shares index fund. Here are two reasons why…
1. It’s Concentrated
The Australian share market is dominated by banks, resources and property-linked businesses. For example, Commonwealth Bank and its band of big bank brethren — NAB, Westpac, ANZ and Macquarie — routinely make up 30% or more of the ASX 200 index.
Throw in resources and property shares and you have an investment portfolio heavily exposed to cyclical industries. Right now, the bank, property and resources sectors are holding up pretty well — but it won’t always be that way.
2. Low-er Growth
Since the GFC, ‘growth investing’ has outperformed ‘value investing’. To me, there’s really no difference between growth and value investing. However, different types of investors tend to do better at different times during the market cycle.
For example, in the late 1990s and early 2000s investors fell over themselves to push technology stocks to extremely high levels and value investing looked like a dog’s breakfast. Fast forward a few years and the cycle ended in pain for many growth investors when the dotcom bubble popped.
Many value-conscious investors have struggled over the past three years. In the next five years, I find it very difficult to imagine ‘growth investing’ will be as easy as it has been recently. But if it is, look out. With interest rates near all-time lows and valuations looking quite stretched already, all investors may have to work even harder to carve out an annualised return over 5% per year.
There’s no such thing as a risk-free investment in the sharemarket and there is no guarantee ASX 200 or ASX 300 index funds will still be the best Aussie share investments we can make over the next decade. To be sure, I expect they’ll still beat a majority of fund managers over the long run.
However, when we stop and carefully consider the outlook for the local market it may be time to consider slightly tweaking your exposure to other asset classes (bonds, commodities, property), geographies and strategies.
Disclosure: At the time of publishing Owen does not have a financial interest in any of the companies mentioned.