Global investment portfolios

Global Investment Returns Yearbook 2014The Credit Suisse Global Investment Yearbook 2014 is now available for download from Publications – Credit Suisse. The yearbooks are an extension of the research of Elroy Dimson, Paul Marsh, and Mike Staunton, first published in the 2002 edition of “Triumph of the Optimists”. As always the yearbook is an interesting read. What lessons can we derive from the updated long term returns from 37 national markets?

 The table below provides real returns on equities, bonds, and bills for all nations in the database that have had continuous markets over the 1900 – 2013  period.

Country Equities Bonds Bills
Australia 7.4% 1.5% 0.7%
Austria 0.7% -4.1% -8.1%
Belgium 2.6% 0.2% -0.3%
Canada 5.7% 2.1% 1.5%
Denmark 5.2% 3.1% 2.1%
Finland 5.3% 0.0% -0.5%
France 3.2% 0.0% -2.8%
Germany 3.2% -1.6% -2.4%
Ireland 4.1% 1.4% 0.7%
Italy 1.9% -1.5% -3.6%
Japan 4.1% -1.0% -1.9%
Netherlands 4.9% 1.5% 0.6%
New Zealand 6.0% 2.0% 1.7%
Norway 4.3% 1.8% 1.1%
Portugal 3.7% 0.6% -1.1%
South Africa 7.4% 1.8% 1.0%
Spain 3.6%  1.4% 0.3%
Sweden 5.8% 2.6% 1.9%
Switzerland 4.4% 2.2% 0.8%
United Kingdom 5.3% 1.4% 0.9%
United States 6.5% 1.9% 0.2%
World 5.2% 1.8% 0.9%
World ex US 4.5% 1.6% 0.9%

Source: Credit Suisse Global Investment Returns Yearbook 2014

What can we take away from these long term return histories:

  • Historically, the markets have offered investors compensation for bearing risk, as equities have realized premium returns over bonds; and bonds have offered premium returns over bills.
    The world risk premium for stocks over bonds was 3.40%
    The world risk premium for bonds over bills was 0.90%
    The world risk premium for stocks over bills was 4.30%
  • Although some nations have realized better historical performance than others, and we can expect differences in future returns, we can have no assurance of exactly which national markets will be relative winners or losers going forward.
  • Investing globally can diversify the risk that one’s home market will provide poor future returns.
  • With historical real returns for globally diversified stock/bond portfolios ranging between 3%  and 4%, prudence suggests that investors should pay special attention to limiting investment costs and tax expense.

The best way to garner these returns is to index a globally diversified portfolio. Today in the US we can invest globally using index funds from a wide list of index fund providers.

Vanguard makes this possible, using its four-fund balanced portfolios (see Vanguard four fund portfolio – Bogleheads)  or by using  separate asset class index funds for US stocks, US bonds, international stocks and international bonds.

Three Vanguard balanced portfolios

Many other investment companies now offer index funds that make creating  a low cost globally diversified portfolio possible (for an overview, see Three-fund portfolio – Bogleheads) or a link from the selections in the table below.

More selections are available.

Investment Company Wiki link
Blackrock iShares Blackrock iShares
Charles Schwab Charles Schwab
Dreyfus Dreyfus
Fidelity Fidelity
Northern Funds Northern Funds
TRowe Price T. Rowe Price
Thrift Savings Plan Thrift Savings Plan

Barry Barnitz, an administrator of the John C. Bogle Center for Financial Literacy site.

Posted in Bonds, International stocks
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