Diversification is one of the fundamental principles of investing. But that doesn’t just mean spreading your investments by asset class (i.e. between cash, fixed interest, property and shares). 

There are many ways to diversify a portfolio. It’s good to have diversification within each asset class, so holding many different shares rather than just a handful, for example. It’s also good to spread your investments across industries, so you have exposure to a range of businesses in sectors like infrastructure, healthcare, technology and consumer goods.

How ‘going global’ can help 

Over the last three years or so, we’ve seen the advantage of ‘going global’, aka diversifying by investing in multiple countries. Since the post-covid share market drop in June 2022, the NZX 50 index has risen by around 30%. Meanwhile, the S&P 500 index (US shares) rose by around 89% over the same period, and the MSCI World Index (global shares) gained 65%.

Investing outside New Zealand therefore generated two to three times the rate of return for investors. When investing offshore, it’s important to factor in changes in the value of the New Zealand dollar as this will impact returns from investments in other currencies. However, this is generally less of an issue over the long term. 

While investing directly in global shares is much easier these days, either via brokers or with platforms like Sharesies, it’s not always that straightforward for DIY investors. Some countries, such as the USA, will require you to complete a non-resident tax form, and you’ll need to purchase foreign currency.

One of the keys to successful share investing is to have in-depth knowledge of the companies you’re investing in, and that’s easier said than done for most of us. While most companies listed on the NZX are well known to us, companies on other exchanges, with the exception of the biggest global brands, are largely unknown.

An easier way 

A much simpler way to invest globally is via either an exchange-traded fund (ETF) or a managed fund that invests in global shares or shares in a specific country or region. An ETF combines a collection of shares in a single fund that’s traded on the share market just like a single share. ETFs generally track a particular index, like the NZX 50 or S&P 500, which means they hold all the shares included in that index and in the same proportion. This type of ETF is called ‘passive’, whereas an ‘active’ ETF will have portfolio managers deciding which shares will be included in the fund based on their research and estimates of future performance. The price of an ETF is determined by the share market. 

Managed funds offer another solution. The key difference is that such funds are not listed on the share market, and the price is determined by the value of the underlying assets rather than directly by the market. This means that the price of a managed fund can be less volatile than the price of an ETF.

Our share market is relatively tiny, comprising just over 1% of the value of global markets combined. So, investing only in New Zealand means a potential missed opportunity. The question is, how much of a portfolio should be invested globally? This decision is best made in conjunction with an adviser, as it will depend on your investment time frame, your attitude towards investment risk, your financial circumstances and several other factors.

Looking to the future 

Looking forward, the big question is whether global markets will continue to outperform New Zealand. We have yet to see the full impact of US tariffs on the global economy. Many of those countries likely to be detrimentally impacted are our trading partners, and our economy may suffer through reduced demand for our exports.

The reason diversification is important is that we can’t predict the future. Spreading investments across geographies helps to reduce investment risk as different countries have different economic cycles. While New Zealand has been lagging in the last few years, we’re seeing signs that our economy is on the rise again, and the tables could well end up being turned. 

Written by: Liz Koh
Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.