Should you invest overseas? My view is simple: yes.
There are, I grant you, challenges in doing so. It’s a little more complicated, for sure. The tax situation can sometimes be messy, with dangers such as withholding tax to try and avoid, and country-specific forms to fill in.
For many investors, too, there’s a sense that they at least know and understand the UK stock market to some extent, and so feel better informed about many of the companies that it contains.
Australia, Germany, France, Singapore, Canada, the United States — we might know a little, say these investors, but there isn’t the same level of day-to-day visibility and awareness. Better by far, they think, to invest at home, where the risks are at least more apparent.
Notwithstanding all that, I’m still of the opinion that such views are generally mistaken.
To be sure, investing overseas is more complicated. Yes, the tax position does need careful consideration. Yes, there may be forms to fill in. And yes, one can argue that the risks are greater — not least because investors’ level of knowledge, all things considered, probably will be lower.
And for income investors, yields can be lower, too — especially in the United States. Last time I looked, the broadly based S&P 500 index of America’s 500 largest quoted companies yielded just over 1%.
But in my view, if investors don’t invest overseas, they face other risks — risks that are near certainties.
Home-country bias, for instance. Inadequate diversification. Missing out on opportunities to invest in industries, sectors, and individual companies not contained within the UK stock market.
And — perhaps most worryingly — missing out on the superior performance of overseas stock markets. Over the past five years, for instance, the FTSE 100 is up by 26%, but America’s S&P 500 index up by just over 110%.
Why might America’s S&P 500 have outperformed the UK’s FTSE 100 by such a margin?
Forget Brexit, Covid-19, and the sluggish UK economy as causal factors. While these play some part, the real reason lies elsewhere — and a clue is provided in what I wrote above about missing out on opportunities to invest in industries, sectors, and individual companies not contained within the UK stock market.
Consider the S&P 500’s very largest companies, namely Apple, Microsoft, Amazon, Meta Platforms (Facebook), Alphabet (Google), Tesla — I could go on, but you get the idea.
Simply put, the UK has no equivalents for such iconic businesses. Or many other iconic businesses, either: Disney, Boeing, Moderna, Berkshire Hathaway, and Union Pacific.
Don’t forget Asia and Europe
Nor is North America the only potential home for some of your investment capital. Asia, too, is rife with opportunities — not least the world’s largest semiconductor manufacturer Taiwan Semiconductor Manufacturing (TSMC), and Samsung. Where are their UK equivalents? Similarly absent.
Europe, too, contains some doughty stalwarts. Nestlé, ASML Holdings (which manufactures semiconductor manufacturing equipment), Siemens, Daimler, software giant SAP, Bosch, and so on.
But enough, enough. You get the idea, I’m sure.
Routes to wealth
How best to get exposure to these global stock markets? Certainly, index tracker funds are one option, and are popular with many investors.
That said, they’re not necessarily the only way to get overseas exposure — or even the best.
ETFs — Exchange Traded Funds — are also popular with investors, and have the attraction of offering real-time pricing and (potentially) lower holding costs, depending on the fee policy of your investment platform. As with index tracker funds, the ETF provider takes care of the foreign tax side of things.
I’ve certainly held overseas index trackers a plenty in my time, likewise ETFs. But these days, I tend to prefer investment trusts: again, there’s the advantage of real-time pricing, and again, there’s potentially lower holding costs. Again, the investment trust handles the foreign tax side of things.
That said, investment trusts don’t slavishly follow an index, but typically follow themes — income, growth, or emerging markets, for instance.
And of course, it’s always possible to buy the individual company’s shares directly: with a decent broker, you should be able to buy the shares of any of the companies that I’ve mentioned above. You’re on your own tax-wise, though.
Better to be in, than out
In short, my view is simple, and clear. Whatever your route into overseas markets, the important thing is to be in them, and not solely invested in the UK.
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Malcolm holds none of the companies mentioned as individual shares, but holds many or all of them via investment trusts. The Motley Fool UK owns shares of Alphabet. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.