The stale old stock pickers’ debate about whether to bet on the right jockey or the right horse might leave out the most important long-term factor for building a diversified portfolio…you just might do better betting on the right track.
In other words, and for whatever reasons, it might be true that highest amount of value (best mix of return and risk) might come not from the choice of which CEO is in charge or which sector the company works in, but rather on the policy environment in which the companies are forced to operate.
Over time these differences in national policy add up to a very significant difference in stock market performance.
I asked a colleague of mine, Ted Lucas at Lattice Strategies, to run an experiment which looks at a well-diversified portfolio over the past 14 years (the time period during which a wide array of international country data is available) and to tell me how country selection performance stacked up against company selection performance.
He and his crack team (which includes not only financial analysts but also an astrophysicist named Kirsten) created a heuristic to test that hypothesis and what they found is extraordinary.
Comparing six scenarios from 1989 to last fall revealed the relative importance of country domicile compared to company sector or specific company as a source of performance. Lattice Strategies compared portfolios consisting of: a range of country stock indices weighted by capitalization; the same countries weighted equally, a broad range of countries’ stock weighted by sector; the S&P 500, the S&P 500 weighted by sectors and the S&P 500 with each stock weighted equally.
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