Do you want the best returns for the long run? Go to where the growth is.
The financial community loves to talk about US stocks having a 7% real return, after it was popularized in Jeremy Seigel’s Stocks for the Long Run. This translates to 10-11% return before we take inflation into account. The problem with this is that it examines one very unusual subset of time where a country goes from a small fledgling nation to the largest economic empire on earth.
The dataset used by Seigel essentially uses the last 200 years of stock information, beginning in 1802. At that time, the US had admitted 16 states to the Union, and Thomas Jefferson had not even signed the Louisiana Purchase. During the next century and a half, we expanded across a continent and had only one major war on our home soil. America was the very definition of an emerging market.
We cannot expect the US to grow and innovate on the scale seen in the past. For portfolio growth, emerging markets are the best bet. Look for nations where factories are being built and most of the populace is poor. Industrializing countries where much of the citizenry are rural and looking for opportunity in the cities are where we need to invest. Resource rich nations are also a good bet.
MSCI Barra identifies 22 countries as emerging markets. Some of the countries identified have been growth engines for some time, such as China. Better growth opportunities may exist in countries like India, Colombia, Peru and Indonesia. With the exception of India, these countries have been overlooked, and all are growing much faster than the US. So make sure that you have some exposure to these emerging markets, or you will miss out on some of the world’s economic growth.
Diversification is the only free lunch offered to investors. If you take all of the different possible asset classes, and allocate your funds between them, you have a diversified portfolio that is insured against everything except global economic risk. You must look outside the US to achieve this diversification. For a passive allocation to stocks, the best bet is to allocate to all portions of the world, such as the Vanguard Total Stock Market Index, in mutual fund form or under the ETF ticker VTI. The Vanguard Emerging Market ETF is VWO, which only charges 20bps of annual fees.
US stocks and bonds are only the beginning of your investment journey. For the best returns, follow the fastest growing economies.
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