A common question for Aussie investors is: "How much should I put into Aussie shares?"

Should you keep your money invested locally or spread it all over the world?

There’s certainly no shortage of opinions on the topic.

Some people suggest Aussie shares are not really worth investing in. Others say there’s no need to invest outside Australia.

In this article, we’ll explore some of the reasons on each side, and how to figure out what the right approach is for you.

This is an important topic to think about, whether you’re a newbie or a seasoned investor. So let’s explore the key differences and what factors we need to consider when deciding how much Aussie shares we should have in our portfolio.

Differences and considerations

Let’s begin with a rundown of the various elements we need to think about. Then we’ll discuss common options people choose (and why), and how to tailor-make your own allocation to suit you and your situation.

Diversification

This impacts how reliant our portfolio is on a single outcome. The more diversified our investments , the less susceptible they generally are to a disappointing long-term outcome. Diversification is much greater in global shares.

Return profile

Australia has a different return profile from many other markets and the global market as a whole. The ASX offers a much higher dividend yield than most international countries, and about double the global average.

Franking credits

Adding to the income, Aussie companies also pass on franking credits with their dividends. These are tax credits we can use to reduce the tax owing on our dividends. Or, if we're in a low tax environment, these turn into a tax refund.

Market size

If we look at the entirety of markets all over the world, the ASX makes up just 2-3% of it. It could be said that by ignoring the rest of the world we’re missing out on growth opportunities elsewhere.

Currency risk

Investing locally is predictable because then our investments and our expenses are in the same currency. By investing overseas, our money is then exposed to different currencies. As the value of the Aussie Dollar changes, so does the value of our global shares, which affects our local purchasing power.

Companies

Global markets give us access to a far greater range of companies than we can access here. Think about it: a few hundred companies versus many thousands overseas. There’s also different industries, different technologies, and different business models.

Familiarity

While many people dismiss this point, I think it’s understated. The fact is, most people simply aren’t keen on investing heavily into companies they’ve never heard of, in countries with different values regarding investor protections, corporate responsibility, and overseen by governments who may be more, well, heavy-handed.

Performance

The US market has outperformed most other countries for a few decades now (depending on which start/end dates you use). But looking back over the long term, say 100 years or so, Australia and the US have shown similar total performance, with both markets being among the strongest in the world.

Why some choose an Aussie heavy portfolio

With all of the above differences, here’s why someone might choose to build a portfolio consisting of mostly (or entirely) Australian shares…

For some investors, owning local investments has a unique appeal. Focusing on assets we can see and drive past can provide more satisfaction and comfort. That’s true whether it’s shares in businesses, or a piece of real estate.

Investors may also feel they better understand the local market, industries, government regulations, business leadership versus how things work elsewhere.

Then, of course, there’s the higher income stream on offer. Many investors, whether retired or not, simply have a preference for cashflow over capital growth.

It can be appealing to know you're getting a 4% dividend which gets bumped up to say 5.5% with tax credits. Elsewhere, you may pocket a 2% yield, then relying on growth to make up for it (NOTE: this is just a hypothetical, and not based on an actual specific investment).

Now, to be fair, there’s more to it than that because global companies often buy back shares with excess cash, which is effectively the same as paying a dividend. But some people just don't want to sell shares to create that extra income, even if it works out the same in the end.

For those in retirement, or wanting an effortless side income, you can see the appeal. There’s also no need to worry about currency issues, since the investors’ income and personal expenses are in the same currency.

At the end of the day, some people also just aren’t bothered about making sure they have maximum diversification. It’s hard to push that on people if they deem the risks of not diversifying to be low, and the strategy they employ is more enjoyable.

Investors who stick mostly with Aussie companies may prefer the familiarity of those businesses. This factor has weakened in recent years, with the biggest US companies now also being ones we use every day. In times past, that wasn’t the case, and many large US firms were virtually unheard of here.

Why some choose an Aussie light portfolio

Now let’s consider why someone would choose to craft their portfolio around global shares, either ignoring Aussie shares completely, or investing a smaller amount.

As you might guess, it’s almost the opposite to the above!

These investors might prefer capital growth over income. They may not like the concentrated nature of the Australian market, since around half the market is made up of financials and resources.

Global-focused investors have diversification as a top priority. They want to reduce the risk involved with tying themselves to a single country and economy. This makes sense, because none of us know with any certainty what the world will look like in 30 years’ time!

The global investor often, though not always, tries to have their personal portfolio match that of the global market. So, if the US market makes up 70% of the world’s stock market value, they’d make sure about 70% of their portfolio was US shares.

This can mean mixing and matching a few different ETFs to make sure the weightings are reasonably accurate. And with the Australian market at just 2-3% of the world’s market value, some would choose to ignore it completely (I mean, it’s not the most exciting market after all!).

Other globally focused investors would make a concession here, though. They’d look at two things: currency risk, and franking credits. Franking credits are unique to Australia-based investors, so it’s worth taking advantage of this benefit.

For currency, it’s obviously risky to have all your money invested overseas and be fully exposed to the changing AUD value relative to other currencies. This probably deserves its own article, but to overcome this the investor can either add Aussie shares to reduce this risk, or use ‘hedged’ versions of global shares. This lets them invest in overseas shares, with the value still pegged to Australian dollars.

Why some choose the middle ground

Depending on who you are, you might think one side makes a whole lot more sense than the other. Or maybe you’re not sure. Maybe you think there are some decent reasons for both approaches.

So rather than going for one end of the extremes, maybe you fit somewhere in between. Instead of all Australian shares or none, maybe take a position that’s more in the middle ground.

Doing this can balance out many of the points we’ve covered. Plus, it can avoid regret of picking one option over another, when one is inevitably underperforming. A bit like when we talked about investing a lump sum vs dollar-cost averaging . The middle ground of investing some as a lump sum and dollar-cost averaging the rest tends to be the most psychologically comfortable option.

For this conversation, that could mean a 50/50 split between Aussie and global shares, which is a relatively common approach. Or it could mean you lean slightly towards whichever side makes the most sense to you.

If you prefer Aussie shares, but want the diversification of global shares, maybe you go for 70/30. If you prefer global shares, but want the higher income or franking credits, maybe you go for 30/70.

Long-time followers will know this already, but I started in the all-Aussie camp. This is purely because I wanted the higher income stream. Being an early retiree, I found this more valuable and wasn’t bothered by having less diversification.

Over time, as I came to appreciate the usefulness of being more diversified, and my reliance on the portfolio reduced, I have a growing allocation to global shares.

How to decide

With all that said, how are you supposed to figure out which option to go with?

Hopefully the previous sections have helped you think about this, if you hadn’t already decided. But to tailor-make your portfolio, here’s how you do it:

You think about which of the above factors are most important to you.

Think about your personal goals, and what you want your portfolio to look like over the next 10, 20, 30 years.

Do you just want a decent side income stream and you don’t care about optimal diversification?

Are you focused on long-term growth potential and don’t care about income?

Do you simply have much more interest investing in one group of companies (or country) over another?

Maybe you’ll be in a high tax bracket for a long period, so you want to invest in the lowest yielding/highest growth assets to minimise your tax burden.

Or maybe you can’t psychologically get over the idea of selling down shares for income, so you need to invest in assets which already provide a decent stream of cashflow.

There are so many factors that affect your answers to these questions. So what’s the right amount to invest in Aussie shares? In short, I don’t think there is a ‘right’ number.

Final thoughts

The reason people choose to invest differently is because they value different things.

To paraphrase Morgan Housel, when you see people arguing about different investing strategies… recognise these people are just playing different games.

We prioritise different things because we’re separate human beings, each with our own experiences, motivations, goals, flaws, and biases. So even if there was a perfect portfolio in theory, good luck getting everyone to be happy with it, stick to it, and not have their own psychology screw it up.

Ultimately, the best strategy is the one you can stick with through thick and thin. Because, as I’ve mentioned many times before, your progress to financial independence is largely driven by the power of your personal finances , not the performance of your portfolio.

Until next time, happy investing!