Looking abroad for long-term investment returns

APPLE. As consumers, we are all aware of the transformative nature of the iPhone and the enormous influence it has had on our lives.

Yet as investors, we are probably not aware of the fact that Apple has been the second best-performing stock of the S&P 500 Index over the past 20 years.

Over the past two decades, Apple shares have delivered a total return to investors of just over 38,000 per cent - equal to a compound annual growth (CAGR) rate of 34.8 per cent.

But what about Singapore's stock market leaders? The best-performing constituent stock of the local Straits Times Index, over the past 20 years, has been Singapore Exchange.

Its total return was 2,870 per cent, meaning its shares delivered a CAGR of 18.5 per cent. There is no doubt that that is impressive. However, that was around half that of Apple's annualised return during the same period.

Therein lies a lesson for investors. Looking overseas for investment returns can help us boost our portfolio's performance over the long term.

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The upshot? It can help us reach our own financial goals earlier than anticipated, whatever they may be.

Home bias

As investors, we are all guilty of "home bias", wherever we come from. The moniker connotes a tendency investors have to put money into their home market, mainly due to a confluence of factors that include familiarity, perceived safety and accessibility.

Yet, there are many great reasons to invest abroad which are not spoken about enough. Besides geographic diversification, there is also the matter of exposure to the largest stock markets globally.

For example, as of the first quarter of 2021, the market value of all US listed stocks combined added up to a whopping US$45 trillion.

That combined market capitalisation (or market cap) means that US stocks make up more than two-fifths of the overall global market cap of over US$100 trillion.

For investors not to have any exposure to the US stock market means missing out on some of the world's biggest, and fastest-growing, companies.

Understanding differences

When we do venture overseas to invest, though, we need to be aware of the idiosyncrasies of the particular market.

In the United States, for example, many companies from around the world list on its stock exchanges. Ultimately, what this means is that you can actually purchase shares of non-American companies too - all in US dollars.

Some prime examples of this include companies that are "dual-listed", so a local listing (in their home market) and one on a US exchange, such as Japanese electronics giant Sony Group Corp, Swedish streaming provider Spotify or Taiwanese semiconductor giant Taiwan Semiconductor Manufacturing Co, otherwise known as "TSMC".

The ubiquitous allure of US stock markets means that investors in Singapore can easily invest in global companies, wherever they happen to be based.

What about China?

All the headlines recently on China stocks have focused on the clampdown by regulators on its tech giants, such as Didi Global, Tencent Holdings and Alibaba Group Holding.

Yet in Hong Kong, the stock market is home to a wide range of companies for us to invest in. Many have exposure to specific sectors of China's phenomenal growth.

Earlier this year, the Hang Seng Indexes Company (which compiles the city's stock benchmark Hang Seng Index) announced that it aims to progressively expand the number of constituent stocks in the index to 100 - up from 52 at the start of 2021 - to better reflect the types of stocks listed in Hong Kong.

This was a tacit recognition that the make-up of the old index failed to accurately represent the heft that large-cap Chinese companies had on the local stock market.

Despite that, for every S$1,000 you had invested in the Hang Seng Index 20 years ago, you would today have S$4,410.

That would give you a total return of 341 per cent, or a CAGR of 7.7 per cent, over the past two decades (see table).

Look over the long, long term

Finally, regardless of where we invest, when we put our money to work our mindset should be the same. That is, focused on the long term and how we can best reach our own financial goals.

Everyone will be different, in terms of their comfort level holding foreign stocks, but broad access to both US and Chinese stock markets is incredibly simple nowadays through the use of exchange-traded funds (ETFs).

For all investors, beginners and veterans alike, there has never been a better - or more convenient - time to be investing in global stock markets.

• The writer is head of content, ProsperUs. He owns shares of Taiwan Semiconductor Manufacturing Co.
• This is the sixth instalment of Invest & Grow, a weekly 10-part series that aims to help new investors get started on their investment journey