Why Bogan Pride is Destroying Your Investments

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A recent article in The Age highlighted just how tiny Australia’s stock market is.

The Australian Securities Exchange represents only 2 per cent of the world’s share markets by market capitalisation

The largest dozen companies on the ASX, by market capitalisation, are more than 55 per cent of the index. The banks alone are close to 40 per cent. So even if you think you’re diversified across the ASX, you’re almost certainly not. 

It’s a familiar tale. Investors put money into large established businesses in the hopes of a reasonable return.

Call it misplaced patriotism or Bogan pride, but Aussies buy stocks in household names.

How do you think those investments have paid off?

Overall, the S&P/ASX 200 is down 5.33% for the year.

Things get more interesting when you look at the performance of the top 20 ASX stocks based on market capitalisation.

Source: Marketindex

As you can see, only six of the top 20 Aussie stocks are in the black so far. The rest are all in the red. In fact 10 of those companies have losses in the double digits.

Looked at another way, if you had invested $20,000 at the start of the year ($1,000 in each company), your down a total of $1,538. Even more when you factor in your brokerage costs.

Too many Australians tuck money away in blue chips stocks because it seems like the sensible thing to do.

Yet, it’s hardly a diversified portfolio. It’s far too heavy on the banks. There’s limited exposure to retail, insurance and energy related companies. And there’s no exposure to technology stocks.

And no, there’s no way Telstra could be considered a technology stock.

The point I’m trying to make is that putting your money only into the big boys drastically skews your portfolio in the wrong direction.

Simply put, when you invest in the biggest market capitalisation stocks on the ASX, you’re basically investing in the broader direction of the market — not in quality business.

This means, when the XJO has gone down a little bit, your portfolio drops a little bit.

The other side of that of course is that when the XJO rises a smidge, your portfolio rises a smidge too.

That’s great, you say? You’re only after a few small, consistent returns anyway.

Well, no. It’s not.

By all means, include a few blue chips in your portfolio. But don’t just load up on the biggest household names you can think of.

A truly diversified portfolio should have investments in all sections of the market.

Some Aussie’s seem reluctant to invest in companies outside the top 100 companies on the ASX.

But if you look around, there’s plenty of opportunities in small to medium companies as well.

As an example, Aussie small cap tech stocks have performed extremely well this year.

Sam Volkering, the editor of Australian Small-Cap Investigator, unearthed two unknown ASX tiddlers earlier this year.

One of the companies is up 28% since being recommended in June. And the other rallied an incredible 263%. And that’s just since Sam recommended it in April. The actual stock in question is up a mind blowing 1250% for the year to date.

How’s the performance of the top 20 looking now?

It’s not just unheard of tech stocks that have done well.  There’s currently a consumer durable stock in the Australian Small-Cap Investigator stable, transforming from a $135 million market cap business to $873 million market cap company in 14 months. Giving subscribers 440% return along the way.

For some people, the small cap market seems risky. Don’t get me wrong, it can be.

However, including a few quality small and medium caps can help give you exposure to other areas of the market.

Invest a percentage of your cash in blue chips, some in bullion, some in cash, and some in small to medium size companies as well.

But as The Age pointed out earlier, the Aussie market makes up 2% of the global markets based on market capitalisation.

If you only investing in local stocks, your missing out on 98% of the other opportunities in the market.

It would be too easy for me to mention Google’s [NASDAQ:GOOG] stellar 728% rate rise here as an example of the opportunities abroad. Not everyone is happy to fork out US$728 (AU$1,032) per share for a tech investment.

However, there are solid returns to be found in the international markets, with a much smaller price.

Take Chinese based and Nasdaq listed tech stock Weibo Corp [NASDAQ:WB]. Weibo shares are up 23.6% for the year. Or there’s consumer durable stock Cooper Tire & Rubber Co [NYSE:CTB], up a tidy 21%.

And given Australians’ embrace of Costco Wholesale Corporation [NASDAQ:COST], it’s not surprising to discover this retail stock 10.34% higher this year. This means the company must be doing something right when other US retailers, such as Wal-Mart Inc. [NYSE:WMT], Target Corporation [NYSE:TGT] and Best-Buy [NYSE:BBY] are all in the red this year.

When it comes to investing, extend your search beyond the household name. Right now, the biggest blue chips in Australia aren’t performing.

Regards,

Shae Russell

For The Daily Reckoning

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Shae Russell

Shae Russell

Shae is editor of the Australian version of Jim Rickards’ acclaimed Strategic Intelligence newsletter. Jim is a best-selling author…a trusted friend of the CIA, the Federal Reserve and the world banking system. He also helped the US Department of Defense through its first-ever currency war games scenario. With Jim’s insights and analysis, Shae brings you investment tips and recommendations to help you create and preserve wealth through the coming monetary collapse.
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