Billionaire Ray Dalio’s Bridgewater Associates has just released three research reports – Geographic Diversification Can Be a Lifesaver (which you can download below), Peak Profit Margins? – A US Perspective (track down here), and Peak Profit Margins? A Global Perspective (download here). In Geographic Diversification Can Be a Lifesaver Research Report, the fund examined the disadvantages geographic concentration carries with.
The best way we know to earn consistent returns and preserve wealth is to build portfolios that are as resilient as possible to the range of ways the world could unfold. To uncover vulnerabilities that are outside of investors’ recent lived experiences, we find it valuable to stress test portfolios across the various environments that have cropped up across countries throughout history.
One common vulnerability is geographic concentration. In the past century, there have been many times when investors concentrated in one country saw their wealth wiped out by geopolitical upheavals, debt crises, monetary reforms, or the bursting of bubbles, while markets in other countries remained resilient. Even without such extreme events, there is always a big divergence across the best and worst performing countries in any given period. And no one country consistently outperforms, as outperformance can lead to relative overvaluation and a subsequent reversal. Rather than try to predict who the winner will be in any particular period, a geographically diversified portfolio creates a more consistent return stream that tends to do almost as well as whatever the best single country turns out to be at any point in time. So geographic diversification has big upside and little downside for investors.
Geographic diversification is likely to be more important in the coming decades than it has been in our lived experience as investors. Through most of our working lifetimes, countries’ economies and markets have become increasingly intertwined due to globalization and the free flow of capital, under the auspices of the US as a dominant economic force and keeper of a stable global geopolitical order. Looking ahead, China’s ascent as an independent economic and financial center of gravity with an independent monetary policy and credit system is highly diversifying, making the world less unipolar and less correlated. At the same time, the rising risk of conflict within and across countries also increases the chances of divergent outcomes. Additionally, geographic diversification felt less urgent during the recent decade of great returns for most assets and portfolios. Low asset yields going forward make diversification and efficient risk-taking all the more important to investors.”
You can download a copy of Bridgewater Associates’ Research Report – Geographic Diversification Can Be a Lifesaver here: