Looking Abroad for an ‘All Weather’ Portfolio

The WSJ published an article in February that I’d like to share with you. It really does a great job of summarizing a core tenant of our investment programs – worldwide diversification. The point of the article is to highlight new research into how to best build a “safe” portfolio – one with the highest potential return and lowest risk.


The research suggests that the best portfolio, the ‘all-weather’ portfolio, holds a much more globally diversified mix than is common today (most are over-weighted to the U.S. market). In addition, the research shows that over time an investor would earn excess returns, or alpha, by allocating more to the markets that are under-valued relative to corporate fundamentals and their historic valuation averages.


This fits very well with our philosophy for stock market investing here at Worldview – global exposure with regional value rotation. See an excerpt of the article, and the full article link, below.


“Among their findings: First, no stock market provided the best return in all periods. On the contrary, the markets of different countries and different regions tended to fare better at different times. (So, for example, Japan did better in the 1980s, the U.S. in the 1990s and emerging markets after 2000.)


Second, performance in the past has depended to a substantial degree on starting valuations. You generally did best by investing in the stock markets that were cheapest in relation to corporate fundamentals such as earnings and net assets—and you generally did worst by investing in those markets which were expensive on those measures.


Which markets are cheap, and which are expensive, has varied over time, and the performance gaps have been substantial. Over five years or so, those who invested in stock markets when they were very expensive were lucky to break even after counting inflation. But those who invested in markets when they were very cheap often racked up double-digit returns for many years.


This has enormous implications for investors. Far from being safe by sticking to their home market, they would do better to focus on the least-expensive markets and avoid the most expensive.”


Read the full article here.