Safety In Numbers
As we’ve been discussing, diversification is a necessary element to any portfolio. Investing across several uncorrelated asset classes benefits a portfolio’s overall return. However, diversification does not stop there. Smarter investors think globally.
This table shows the annual performance in US dollar terms of 21 developed-country stock markets for the past 14 years, highlighting the top performer in each calendar year.
We’ve already discussed the unpredictability is asset class performance from one year to the next, and we can see that applies to international investing, as well. The annual ranked returns show no obvious pattern that can be exploited for excess profits, strengthening the case for broad diversification across the world equity markets.
Too many investors wonder why they would ever invest in a country like Spain, especially considering the well-publicized economic turmoil they have gone through the past couple years, but let’s take a closer look.
As we can see, Spanish and US equity returns counter balance each other very well. In 2006 & 2007, Spain’s returns outpaced those of the US. However, not to be outdone, US returns rallied from 2010 to 2012.
Those uncorrelated returns help lower the portfolio’s standard deviation (risk) while also benefiting the overall returns.
Although many investors prefer to keep most or all of their capital close to home, they may pay a high price in terms of lower diversification and missed opportunity.
