International investing and diversification

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Okay it is decision time. How should you manage your investment portfolio?

I’m assuming you believe in diversification outside of Canada in order to reduce investment risk. Question: Each year should you predict what country will have the best annual returns and invest there?

According to the Dimensional Matrix Book 2019, during 2015 Denmark had the highest stock market returns of any developed country. Unfortunately, the next year it had the worst performance.

In 2000 New Zealand had the lowest return among developed markets and recovered nicely by leading all developed countries the next two years.

The last 20 years should be a warning that predicting market performance on a short-term basis is a bit of a guessing game at best.

Guessing incorrectly can be expensive. The largest annual outcome differences during the last two decades was 69 percent. That year Norway markets were up to 59 percent while Japan was -10 percent.

The year with the smallest difference between the best and worst markets showed a return difference of 26 percent. Finland was a positive 5 percent while Austria was -21 percent.

Call it predicting or call it guessing but attempting to outsmart the market by making short-term investment decisions can be hazardous to your financial health.

The other option is to invest in a fully diversified international portfolio. Be patient and let the markets work for you slowly over time.

Returns will be more predictable and less volatile. That for most investors is a dream. A dream that will most likely come true by using the simple proven technique of diversification.

Over the last 20 years the return from the collection of stock markets from developed countries produced excellent returns with relatively small volatility.

Every dollar invested nearly tripled in value.

This is not an exact figure because it does not include investment and trading costs. But it does provide an excellent proxy of the type of investment returns that are possible.

 

 

Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI).  ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).  The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments