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The following graphs show the normalized growth in the stock indexes of various countries. Inflation of the country has been deducted from the returns measured. The point of convergence is in the early 1950's after the world wars. The vertical axis is a log scale, so that it is the slope of the line that is important. A rise from 50 to 500 is the same rate of return as a rise from 100 to 1000. In both cases that averages at 3.9%.

The charts were created by William Goetzmann of Yale University. It is a shame that the growth is measured in US dollars instead of the homecountry currency. The deduction of the local inflation combined with the exchange effects of the US dollar is an error in logic. It effectively deducts local inflation twice. While there are many factors influencing exchange rates, inflation plays a big role. High inflation degrades a currency and leads to its weakening. The FX translation effectively deducts inflation for a second time.

Returns must be measured from somebody's point of view. A US investor repatriates the foreign nominal returns (giving rise to the FX translation effects included here). But he is impacted only by US inflation, not the inflation of the foreign country. An investor from the other countries has his returns degraded by the local inflation (the effect included here). But he is not impacted by exchange rate translations.

Regardless, the points you should take from these graphs are:

  • Stock returns have varied widely in different countries. Some wildly successful. Others not.
  • The time period of successful returns has varied between countries historically. Yet we know from 2008 that this may not be the case in the future.
  • The benefits from diversification require that your holdings from different countries must include MANY, MANY countries, not just a few.

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