Are you globally diversified? We hope so.
Should you be? Yes, we strongly recommend it.
What does globally diversified mean?
If you own only large US based companies, with business operations around the world, does that count as globally diversified? No, as stocks based outside the US sometimes perform differently than US based stocks.
- Being globally diversified means owning companies throughout the world which are based in other countries.
- We recommend that approximately 30% of your stock portfolio, depending on your personal circumstances, should be invested in companies based outside of the US.
Why is this so important? Because based on data since 1970, the returns of a globally diversified portfolio, allocated to various asset classes and with approximately 30% of the portfolio based outside of the US, would have outperformed the S&P 500 by a margin of 4 to 1.**
Let me explain that again, so it is very clear.
- If you had invested $1 in the S&P 500 in 1970, you would have had $100** at the end of 2016.
- If you had invested $1 in the “Dimensional Global Balanced Equity Strategy (the Diversified Portfolio) in 1970, you would have had $400** at the end of 2016.
- Don’t you think broad global diversification is worth the difference between $400 and $100?
Diversification requires discipline. Diversification means that some years the S&P 500 will outperform such a Diversified Portfolio. But being broadly and globally diversified, with exposure to small, value, international and emerging market stocks means you will have a greater opportunity for a more desirable outcome.
- Based on this analysis, the S&P 500 did better than the globally diversified portfolio in 18 years.
- However, the globally diversified portfolio outperformed the S&P 500 in 29 years, or nearly 62% of the annual time periods.
- The globally diversified portfolio outperformed the S&P 500 in 84% of the overlapping 10 year periods between 1980 and December, 2016.**
- While the expected returns of a diversified portfolio should be beneficial, the rewards sometime require patience.
- During the 1970s, the globally diversified portfolio outperformed.
- During the 1980s, the globally diversified portfolio outperformed.
- During the 1990s, the S&P 500 far outperformed.
- From January 2000-December 2009, the globally diversified portfolio outperformed.
- From January 2010-December 2016, the S&P 500 slightly outperformed.
The globally diversified portfolio in this analysis is representative of the portfolios we recommend for our clients, which means they include asset classes like the S&P 500, as well as significant allocations to US large cap value, US small cap and small cap value, US real estate, international value, international small cap value, emerging markets and emerging markets value and small value. The portfolio would also be regularly rebalanced, to maintain the appropriate allocations between asset classes.
While this presentation may be new, the concepts are not. These are some of the guiding principles we have used to construct portfolios since founding our firm in 2003. We have adhered to these principles of global diversification and allocations to small and value stocks. They have proven the test of time, both in the real world as well as in academic data.
Information like this should give you confidence, as we base our recommendations and advice on real data, not on crystal balls or guesses about the future. As the world is changing so rapidly, our approach to investing should help you feel more secure. And be financially rewarding.
We know there is no such thing as a free lunch. But in the financial markets, being globally diversified across asset classes is as close to a free lunch as you can get.
**Source: For this essay, all data presented is based on Dimensional Fund Advisor presentation titled “The Case for Global Diversification” which is available upon request. Various indices were used for this analysis. Fees have not been deducted and the performance does not reflect the expenses of an actual portfolio. See this report and its Appendix for full disclosure information.