The 5 major components of building a globally diversified portfolio

October 30, 2017

 

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1 Data cover January 1, 1900, through December 31, 2015, and are in U.S. dollars. Nominal value is the return before adjustment for inflation; real value includes the effect of inflation. Moving from left to right in the figure, the stock allocation relative to bonds increases in 10-percentage-point increments. The bars' length indicates the range, from 5th to 95th percentile, of annual returns for each allocation; the longer the bar, the greater the variability. The numbers above each bar show the average annual nominal and real returns for that allocation for the 116 years covered.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each asset class and macroeconomic variable modeled. Simulations are as of September 30, 2016. Results from the model may vary with each use and over time. For more information, please see Appendix I on page 19 in the research paper.

Sources: Vanguard calculations, based on Dimson-Marsh-Staunton Global Returns data from Morningstar, Inc. The Dimson-Marsh-Staunton Global Returns set includes returns from Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Russia, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

2 Global equities are represented by the MSCI All Country World Index. Global bonds are represented by the Bloomberg Barclays Global Aggregate Bond Index

Source: Vanguard, based on Vanguard Capital Markets Model® (VCMM) forecasts.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

3 Data are in U.S. dollars, as of December 31, 2015 (the latest available from the International Monetary Fund, or IMF). Domestic investment is calculated by subtracting total foreign investment (as reported by the IMF) in a given country from its market capitalization in the MSCI All Country World Index. Given that the IMF data are voluntary, there may be some discrepancies between the market values in the survey and the index.

Sources: Vanguard calculations, based on data from the IMF’s 2015 Coordinated Portfolio Investment Survey, Bloomberg, Thomson Reuters Datastream, and FactSet.

4 Data reflect active open-end funds available for sale in the respective regions. Asia ex Japan includes funds in China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, and Taiwan. Fund data include surviving funds plus ones that closed or merged during the period. Data for the United States, United Kingdom, and Australia cover the 15 years ended December 31, 2015. Data for Canada and Asia ex Japan cover the 10 years ended December 31, 2015.

Sources: Vanguard calculations, using data from Morningstar, Inc.

5 This example is hypothetical and does not represent the returns of any particular investment. The rate is not guaranteed. It assumes a portfolio of 50% global stocks and 50% global bonds, with no new contributions or withdrawals and with no taxes considered. All returns are in nominal U.S. dollars, and all statistics are annualized. Stocks are represented by the Standard & Poor’s 90 from January 1, 1926, through March 3, 1957; the S&P 500 Index from March 4, 1957, through December 31, 1969; the MSCI World Index from January 1, 1970, through December 31, 1987; the MSCI All Country World Index from January 1, 1988, through May 31, 1994; and the MSCI AC World IMI Index from June 1, 1994, through December 31, 2015. Bonds are represented by the S&P High Grade Corporate Index from January 1, 1926, through December 31, 1968; the Citigroup High Grade Index from January 1, 1969, through December 31, 1972; the Lehman Long-Term AA Corporate Index from January 1, 1973, through December 31, 1975; the Bloomberg Barclays U.S. Aggregate Bond Index from January 1, 1976, through December 31, 1989; and the Bloomberg Barclays Global Aggregate Bond Index (USD Hedged) from January 1, 1990, through December 31, 2015.

Sources: Vanguard calculations, based on data from FactSet. Stock weightings have been rounded to the nearest whole number.

All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

Diversification does not ensure a profit or protect against a loss.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

 

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