DIf you choose to take a position outside the UK but then determine to place all of your money in China, it’s like a shot in the dead of night.
This means you usually are not spreading your risk and are exposed to the largest fear most of us have when investing: the potential for total loss.
Studies have shown that as a species we might quite kill two birds with one stone than five on the roof – if meaning risking a dead parrot.
In other words, we’re more loss-averse than profit-hungry.
And this is essential within the context of foreign investment, because some countries have performed a lot better or (more frighteningly) much worse over the long run.
Long-term returns on the stock markets of assorted countries
| Annualized real return: GBP (British Pound) |
Growth of £1 since 1900 | |
| Australia | 6.4% | 2,134 |
| Belgium | 3% | 38 |
| Canada | 5.2% | 520 |
| Denmark | 6.8% | 3,388 |
| Finland | 4.9% | 375 |
| France | -0.1% | 0.87 |
| Germany | 3.5% | 74 |
| Italy | 1.7% | 8 |
| Japan | 3.6% | 80 |
| Netherlands | 5.5% | 742 |
| Norway | 3.9% | 118 |
| Portugal | -0.2% | 0.81 |
| Spain | 3.8% | 101 |
| Sweden | 5.8% | 1,069 |
| Switzerland | 5.7% | 968 |
| United Kingdom | 4.8% | 341 |
| USA | 6.9% | 3,703 |
| World | 6% | 1,344 |
Data from JST Macrohistory, The Big Bang, MSCI, Russell/Nomura Japan Index, Aswath Damodaran And FTSE Russell.August 2024.
Small differences in returns are essential
When I first saw these cumulative real return data for every country, they were an actual revelation to me.
It’s a reminder that seemingly small differences in compound interest have big implications.
In terms of annual returns, the difference between equity investments within the UK and the US doesn’t appear to be that big:
- On average during the last 124 years, the annualised real return on equities for a British investor is 4.8 percent.
- During the identical period, US investors enjoyed a rather higher annualized return of 6.9 percent.
What is 2.1% between two countries separated by a standard language, you ask?
In the long term, nevertheless, such small differences actually add up:
- A British investor who had reinvested all dividends since 1900 would have multiplied her portfolio 341 times.
- The same US portfolio would have multiplied 3,703 times!
These are two countries where returns have historically been in the identical range.
Warning examples from global stock markets
Unlike the lucky Brits and Americans, a particularly proud French investor who had invested all his money in lower-yielding French stocks would even have lost money.
The magic of compound interest proved to be an affordable party trick of their case. Instead of our French Rip Van Winkle (and a bit more) waking up with a snowball stuffed with money, they found that their original stake had shrunk by 13% (even with dividends reinvested!)
And it isn’t as if France is Russia. There was no communist revolution here that might explain the failure of the “long-term stocks.”
It wasn’t even due to the destruction attributable to two world wars.
Rather, the true damage was attributable to a post-war bear market that was fueled by the nationalization of commercial facilities, high inflation and currency devaluation.
The recovery began in 1983 and France has enjoyed excellent stock market returns since then. There is not any reason to consider that the French market is fundamentally radioactive.
The most vital lesson is that when old hands warn that investing is dangerous, they mean it.
Sometimes and in some places, those risks can trump every comforting buzzword we investors prefer to cling to: mean reversion, compound interest, and long-term investing. All of it.
Land murder
Nobody lives to be 124 (yet), and none of our oldest people were old hands, so some people might say that taking a look at returns over such a protracted time frame is misleading.
I disagree – provided you don’t use the information for purposes which might be appropriate.
This is a particularly great tool for seeing how different countries have generated very different long-term returns.
However, the information shouldn’t be used as a basis for selecting one country over one other when deciding the right way to allocate your money in the long run.
Rather, it’s one other argument for very broad diversification with the assistance of world index funds – because every success and suffering story is different.
Not a single world stock market (yet)
Why did Denmark break away from Sweden and Norway?
And why are the country’s yields only a hair’s breadth behind those of the superpower USA, the winner of the twentieth century?
It shouldn’t be the case that Denmark was considered an English-speaking emerging market of the New World in 1900.
Nevertheless, these explanations explain the success of the United States and Australia – even when Canada’s performance is barely mediocre.
In addition, Denmark’s stock market has boomed over the past 20 years while Britain’s has stagnated. As a result, Britain has slipped into the underside half of the table after a long time of being among the many top performers.
And while it’s true that defeat in a world war shouldn’t be excellent news, Japan and Germany arrived at an analogous conclusion through very different paths.
For example, German society was rocked by devastating crises twice within the twentieth century, and Japan’s spectacular stock market recovery was famously undone by the bursting of a financial bubble and three a long time of sustained stagnation.
Correlation shouldn’t be the goal
Some would argue that the correlation between global stock markets is now too strong for this historical data to be of much interest.
I say: not so fast!
We still see very different results. Compare Denmark and the UK during the last decade:
- Denmark = 13.9% real annualized return (GBP)
- UK = 2.3% real annualised return
These are two highly correlated markets. But although they typically tend in the identical direction, the correlation tells us nothing concerning the amplitude of their individual developments.
While correlation helps us discover complementary asset classes, it doesn’t mean that every one stocks are interchangeable.
Lessons from history
In, writer and stock market analyst Nassim Taleb points out that an investor in Russian or Chinese firms who suffered a complete loss within the early twentieth century would tell a really different story about “long-term investing” than the Americans who write all of the books on investing.
And who says that the twenty first century is not going to hold similar surprises?
It is straightforward to consider that the fate of Tsarist Russia or China is of little concern to modern residents of the wealthy world.
But look again at France. Its society was more advanced than some other on the earth, and yet deliberate government policy decisions ruined the stock market. The same thing could occur anywhere, even within the United States.
Spreading your money across global stock markets remains to be idea to cut back the chance of being 100% stuck in a complete loss for 40 years, and likewise due to the broader diversification advantages.
