Taste The Rainbow... Globally
The following chart is commonly referred to as the "Skittles" chart within the financial services industry. It's also often referred to as the "Callan" chart or the "Periodic Table" chart. (Click on image to enlarge)
This table ranks annual stock market performance in US dollar terms for seventeen different global markets (from highest to lowest) over the last twenty-five years. The colors correspond to the countries featured on the next slide (seen below).
Three things to take away from this chart:
1. The US Market is represented by the black box in the chart. If you look across the top row of the chart, there are no black boxes. This means that the US market hasn't been the leading performer among global developed markets during the period from 1983 - 2007.
2. There are no patterns or trends that can be identified from looking at the chart. Every day, we see new versions and flavors of ETFs and other investments designed to take advantage of niche markets, countries, sectors, sub-sectors and the like. But it's a waste of time trying to predict the future in investing, which is what you're doing if you're trying to time the market or pick superior investment vehicles. While stock markets around the world often outperform the US market, this performance is unpredictable and at times extreme. Investors who follow a structured, diversified strategy are more likely to capture the returns wherever they happen to occur.
3. If your investment strategy is focused solely on the US investment markets, you're missing a lot of other opportunities. These additional opportunities are not just for increasing returns, although I would argue that's a likely outcome over time. But, more importantly, by owning the global markets listed in the chart above, you're creating a portfolio of different asset classes which have different levels of correlation to each other. This will serve to reduce your risk over time.
Here's another perspective on the same data: (again, click the chart to enlarge)
This chart shows annual performance in US dollar terms of seventeen developed-country stock markets for the last twenty-five years, highlighting the top performer in each calendar year. Over this period, the US market was never the top performer.
Reminders:
- Investing in securities markets outside the US helps build more extensive diversification into a portfolio.
- Although many investors prefer to keep their capital close to home, they may pay a high price in terms of lower diversification and missed opportunity.
The solution is to buy everything in every market through the use of low-cost, highly diversified index or asset class funds. Not only will this serve to diversify away a lot of risk, but it will also result in higher expected returns over time.
Charts provided by DFA.
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