Where next for global investment markets…
Given that recent stock market performance has been volatile and economic forecasts poor we’d only be human to ask where all this is heading?
In this regard, as investors, we’d be wise to take a leaf out of Warren Buffett’s book. Whatever you think of the world’s best-known investor, you cannot knock his faith in capitalism and the long term benefits of investing in the real economy.
He points out over the long-term how strongly the odds are stacked in our favour; how short-term distress should not cloud our long-term vision; and how futile it is to try to time entry and exit points in the market. All this sound familiar?
There is also the point that the stock market and economy do not always move in tandem.
Although the UK economy remains one of the strongest in the developed world, its stock market fell by 2.3 per cent (in the year to October 2015) whereas the globally-diversified developed world index returned a positive 2.27 per cent.
So what can we learn from this?
Firstly, reading too much into economic forecasts is a bad thing…they are notoriously unreliable and as we see above aren’t necessarily a predictor of the near future. Instead rather than going through the futile task of trying to predict which asset class or country to invest in the simple (and best) solution is to own “all of them”, or as many as is practically possible. The reason for this is that it is impossible to predict which will do the best from one year to the next (this point is colourfully illustrated in the image above, which we call “The Randomness of Returns”).
The table ranks historical annual stock market performance in GBP for different developed and emerging markets from highest to lowest in each year. Each colour corresponds to a different country and the patchwork dispersion of colours shows no predictable pattern in either the developed or emerging markets.
Holding investments in many different countries (and asset classes) broadens the potential opportunities available to you and can help to reduce the overall risk of your investments. Global diversification, as you know, is an important consideration when we construct our investment portfolios and the past year, like most years, was a good example of why.
Investors who follow a structured, diversified strategy are therefore more likely to capture the returns wherever they happen to occur in any given year. This diversified strategy also reduces the risk of being too heavily invested in any one country or asset class that happens to perform particularly badly in any given year.
Source: All data sourced from Dimensional’s Matrix Book, 2015, and Dimensional’s returns programme. MSCI world index (gross dividends) with at least 25 years of data. MSCI data copyright MSCI 2015, all rights reserved. Economic data from Knoema World GDP Ranking 2015.