United States as The Upper Bound of Developed Market Exposure
An analysis of multi-asset portfolios using developed market ETF's
“Stocks Always Go Up”
Do stocks always go up over the long run? The answer depends on which nation we examine. For the United States, the answer has typically been “yes.” However, the US has maintained a number of favorable geo-political factors that have persisted throughout the post World War II global structure.
The idea that equity indices go up indefinitely is not an a-priori principle of financial markets, but rather an observed phenomena applying to an extremely short list of nations for a relatively small blip of market history. Does naïve equity exposure deliver satisfactory returns post inflation, tax, nation survivorship bias, and geo-political risk factor? The answer isn’t a clear yes.
Research Questions
Can including some subset of developed market exposure (outside the US) improve risk adjusted returns?
Which if any developed nations differ from the US in the timing of their returns?
What is the upper bound of the optimal developed market portfolio?
Modeling
I aggregated data on the performance of ETF’s corresponding to each nation within the MSCI developed markets index. Let’s explore whether it’s possible to improve the risk adjusted returns of a US-only portfolio by taking on global exposure.
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