You should (almost certainly) own more US equities. But how? - Part 2/2

In Part 1 of this two-part piece, I pointed out two important things that I notice many investors do not do - there’s no clearly defined investment goal, and then even when there is, the right positions are often not included.

I say this all the time and it bears repeating - - the critical thing everyone has to do when building their investment portfolio is ask themselves, “what am I trying to achieve?”. Then include the pieces that are best suited for the job.

If you need or want income, Aussie equities make a lot of sense as an Aussie resident taxpayer. But if you’re a growth investor, Aussie equities are a sub-par option compared to a readily available option that is just as easy to trade, the same cost to trade, just as liquid, and just as transparent.

As a growth investor, it is my strident view that you have to buy US equities.

Part 1 is here:

(VIEW LINK)

However, there are potential hurdles to buying US equities for some investors, and hopefully I can help clear some of those up here in Part 2 by answering a handful of important questions. The first 2 questions were:

1. Will US equities continue to outperform in 2026? The answer is yes they will, I think (that’s my personal view - not that of Koda Capital, nor necessarily of any of my Partners at Koda Capital).

2. What portion of my portfolio should be in US equities? The answer is, it depends. Figure out what you’re trying to achieve first.

For a deeper dive on both of those questions, read Part 1 above. With that out of the way, let’s answer 3 more important questions.... ready??

Question 3: Should investors consider things like unfamiliar names in the portfolio, companies that are based outside Australia, and any foreign exchange risks?

In short - no. 

Unfamiliar names are about as irrelevant as it gets. When your car gets repaired, almost everyone has no idea what the mechanic did. Literally zero. The “problem” with investing is that a lot of people think they can do a good job. Maybe they can, some people definitely can. 

But most people think they’re an above average driver, which by definition is mathematically impossible. I think it’s pretty likely the same thing goes for investing.

If you’ve decided to hire a financial adviser (which I believe is beneficial but for some people, not critical), make sure you trust them, make sure they’re credible, and once you’ve crafted a plan with them, and you like it, let them get to work. 

Details like which instruments, any FX risks, what proportion gets deployed when, and in what order, just forget all of that. That’s not to say that investors should know nothing, or stay in the dark, but it is to say that you have that detailed conversation when crafting the plan. 

Consider it like a footy team - the coaches come up with the plan, players and others have input, and everyone agrees on the strategy. But once the ball gets kicked off or bounced, it’s all on the players.

On not knowing the companies, let’s be very clear. Who cares?? You don’t need to know the companies, they just need to be good companies. 

A top 6 S&P 500 company that most people know little or nothing about is Broadcom. In fact, the Magnificent 7 should really be the Great 8, because it should include Broadcom. 

In its most recent earnings report, Q3 sales grew 22% year-on-year to just shy of US$16.0B, and they guided growth in their next period’s sales up by 24%, to US$17.4B. They are quarterly numbers, not annual. CBA’s annual sales in FY25 were US$19B, and US$34B for BHP. For the year, not the quarter.

Do you want exposure to Broadcom? I do. It doesn’t matter that you don’t know a lot, or maybe not a thing, about Broadcom. Engage someone who does, and get exposed.

Question 4: Does the lower rate of dividends in US equities matter?

Remember - - what are you trying to achieve? The majority of investors should be trying to maximise their total risk-adjusted return (that is, the capital growth plus the dividend), but most don’t know that. Most investors think they have to pick one or the other.

Maybe they kind of do, but regardless, investors should start with the end in mind, just as I noted at the top of this piece, and at the top of Part 1.

If you want or need income, then the dividend rate matters, and the sustainability of that dividend matters. 

But if you’re a 28-year old growing your super, who cares what the dividend rate is? You want the highest total return possible, and that requires growth more than it requires a dividend.

But in case there are people who simply can’t live without a dividend, let’s do the after-tax example of dividends versus growth, shall we?

For the last 30 years, the Australian stock market has been up 9.3%, total return (so including dividends). Let’s assume the entire dividend yield was fully-franked and everyone’s tax rate was capped at 30%. All dividends then go to investors entirely tax-free. If the after-tax dividend yield was 3.7%, and your total after-tax return was 3.9% on growth, you total a 7.6% after-tax total return. Not bad.

Now contrast the US returns over the same period, and under the same circumstances. The total return was 10.8%, but much less of that return comes from income. It’s traditionally around 1.8% and I’ll make the assumption that it’s entirely taxable (it isn’t because the bulk of US dividends are “qualified” for tax purposes, but for the purpose of this comparison, let’s assume nothing is qualified).

Your after-tax total return over 30 years is 7.6%. Holy moly, it’s the same!!! Why does this Ferrando clown keep going on about US markets and US returns??

Here’s why.

The gap between 30-year returns in Australia versus the US is 1.5% per year. The 20-year gap is 3.6%. The 10-year gap is 6.4%. 

The maths nerds understand the pattern of relative returns getting worse for the Australian market over time, but I’ll explain it for the rest of us - it’s because the bulk of the good relative returns in Australia were early in that 30-year span, and the Aussie returns have consistently been getting relatively worse over time.

If we use the 20-year returns, the after-tax comparison is 8.1% in the US to 6.7% in Australia. And if we use the 10-year returns, it’s 10.9% versus 7.5%, again to the US. The gap widens as we come in, from 1.4% better US returns over 20 years to a massive 3.4% over 10 years.

Decide what you’re trying to achieve, and then deploy the right piece for your portfolio.

Try not to decide that, for example, Aussie equities are your answer, regardless of the question. They’re not.

QUESTION 5: How do I specifically execute? Is it with individual shares, through mutual funds, through ETFs, or some other way?

I am a Partner at what I firmly believe to be the premier private client and not-for-profit wealth management firm in the country, Koda Capital. The central thesis of the firm has been, is today, and will remain, that we are entirely independent.

Our firm puts clients first, and those clients can sleep at night knowing that there is no chance that their Financial Adviser has selected any ideas for any reason other than that it is in their sole best interest. We believe that is an invaluable point of difference to many (and maybe most) of our competitors.

For that reason, I am unwilling to provide specific execution ideas. That said, with not much effort, you can find ideas that deliver low trading costs, diversification, liquidity, transparency, and other positive attributes. The problem is finding all of that is only part of the effort. 

You still need to know how to construct the portfolio, how much of each piece to deploy to, and when to deploy. Even before that you need to decide, what’s core? What’s tactical? What’s opportunistic? Do I even have opportunistic?

And in case it isn’t clear yet, you need to decide what it is you’re trying to achieve.

Frankly, it is hard to invest well. Same as, when it isn’t your area of expertise, changing your oil is hard, or getting a root canal is hard, or fixing a broken window is hard.

I apologise for potentially copping out here, but my fellow Koda Capital Partners would, quite rightly, never forgive me if I compromised on our independence, so I’m not going to do that.

Conclusion

Let’s quickly summarise – first and foremost, figure out what you’re trying to do. Are you trying to grow, or are you trying to generate income? Or maybe you want a bit of both. Whatever it is, figure it out.

Then, build a portfolio that matches what you need. If you need or want income, defensive ideas and Aussie equities (especially if you’re an Aussie resident taxpayer) are excellent ideas. If you need or want growth however, I think it’s very hard to go past US markets for that, and the bulk of your growth exposure should probably point towards Uncle Sam. You are likely to underperform on a relative basis if you don’t, and on a risk-adjusted basis too.

Lastly, build a portfolio with pieces that do a specific job, which collectively then do the broad job you’re after, and that deliver the best risk-adjusted return for what you’re (you guessed it) trying to achieve.

If your portfolio has only Aussie equities in it today, considering the Australian market is 2% of the world’s market cap, think about expanding your horizons. For your sake.

Remember to not use a Mini Moke to try and move house, and equally remember to not try to use a Toyota Land Cruiser to go into the busiest part of town and find a small and tight parking spot. Especially for Australian-biased investors, and there are many - Aussie equities are not a hammer, and everything is not a nail.

Good luck out there.