January is the month when the fund industry and the financial media like to indulge in new year predictions. Which asset classes or sectors of the economy are going to deliver the best returns in 2023? Nobody knows, of course, but most financial professionals are happy to express an opinion. It’s the same with predicting which country will produce the best equity returns. Choosing periodically to reduce your exposure to some countries and increase your exposure to others is not a good strategy, as this new article from Dimensional Fund Advisors explains.
Investment opportunities exist all around the globe, but the randomness of global stock returns makes it exceedingly difficult to figure out which markets are likely to be outperformers. How should investors deal with this kind of uncertainty?
First, they should remember that it’s challenging, at best, to predict a country’s returns by looking at the past, as shown by the performance of global markets since 2001 (see Exhibit 1). In the past 20 years, annual returns in 22 developed markets varied widely from year to year. (Each colour represents a different country, and each column is sorted top down, from the highest-performing country to the lowest.)
Two examples help make the point well:
- Austria posted the highest developed markets return in 2017 — but the lowest the next year.
- The US ranked in the top five for annualized returns over the entire 20 years but finished first in the country rankings just once over that period. In nine calendar years, it was in the lower half of performers.
Investors can benefit from understanding that they don’t need to predict which countries will deliver the best returns during the next quarter, next year, or next five years.
Why? Holding equities from markets around the world — as opposed to those of a few countries or just one — positions investors to potentially capture higher returns where they appear, and outperformance in one market can help offset lower returns elsewhere.
Put another way, a globally diversified portfolio can help provide more reliable outcomes over time.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Diversification does not eliminate the risk of market loss.
This article first appeared on the Dimensional Fund Advisors blog, Dimensional Perspectives.
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