Concentrated risk is unrewarded in investment portfolios. Diversification is the antidote to many avoidable risks. Therefore, investment portfolios should be comprehensively diversified across and within asset classes and sub-asset classes.
The principle of diversification applies to investing in different countries.
This table ranks annual stock market performance in Australian dollar terms for 18 country markets (from highest to lowest) over the last 25 years. The patchwork dispersion of colours shows no predictable pattern.
Investors who follow a structured, globally diversified strategy are more likely to capture the returns wherever they happen to occur.
Just as rich economies and markets like the United States, Japan, Britain and Australia tend to perform differently to one another, emerging economies and markets tend to perform differently to rich ones.
In US dollars.
Source: MSCI emerging markets country indices (gross dividends) for countries currently in Dimensional’s emerging markets strategies. MSCI data copyright MSCI 2011. Not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
An emerging market is the market of an economy that is in the process of rapid growth and industrialisation. It follows, then, that owning the stocks of emerging markets will diversify a portfolio even further.
Emerging markets historically have provided higher average returns than developed markets. But they also tend to be riskier and more volatile. That’s because their systems of law, ownership and regulation are still developing and they often are less politically stable.
This chart – showing the best and worst performing emerging markets over more than a decade and a half – highlights the difficulty of predicting which market will provide the best returns year to year.
So the key to investing in emerging markets is to take a cautious approach – investing in lots of different countries, keeping an eye on costs and regularly reviewing risk controls.
In US dollars.
Source: MSCI emerging markets country indices (gross dividends) for countries currently in Dimensional’s emerging markets strategies. MSCI data copyright MSCI 2011. Not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
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