The Randomness of Global Stock Returns
2min Video
Investment opportunities exist all around the globe – and it’s hard to know where next year’s best returns will appear. In today's video, we discuss the true randomness of global stock returns. Transcript: Investment opportunities exist all around the globe – and it’s hard to know where next year’s best returns will appear.
Video Transcript:
Investment opportunities exist all around the globe – and it’s hard to know where next year’s best returns will appear. Let’s talk about the true randomness of global stock returns. A globally diversified portfolio can help capture a broad range of returns and deliver more reliable outcomes over time.
Now, it’s difficult to predict future returns by looking at the past, and I wanted to share this table because it powerfully demonstrates the randomness of the equity returns of global markets since 2002. So essentially, we are looking at 20 years of annual returns in 22 developed markets, with each color representing a different country.
Then, in each column, we sort from top to bottom the best to worst performers in a given year. The scattered colors suggest it is hard to predict which country will outperform from one year to the next. For example, in 2017, Austria posted the highest developed market return, but then the lowest return in 2018. Over the last 20 years, if you would have invested solely in the US, you would have missed out on the higher returns of at least 5 other countries, as shown in the annualized column on the right.
Overall, the key takeaway is this: diversification matters. That said, diversification is not an antidote to risk, but it can provide a more consistent experience. Holding equities from around the world allows you to spread out the risk you’re taking, where high returns in one market may help offset lower returns elsewhere.
As always, stay the course and stay on point.
