For even the casual sports fan, the 2018 FIFA World Cup "football" (a.k.a. soccer) tournament has been absolutely thrilling. One of the most exciting stats so far is that four matches have resulted in ties after 90 minutes and two additional 15-minute extra time periods. None of them have managed to settle the outcome and resulted in penalty shootouts, tying the all-time tournament record.
A recent issue of the Economist (the print edition from June 21, 2018 — yes we still read the paper version) studied interesting research on penalty shootouts conducted by Ignacio Palacios-Huerta of the London School of Economics. He tried to determine if there is skill involved, citing that “no relationship exists between a team’s general quality and its success in such shoot-outs. What analysis does suggest, though, is ways to improve the odds of victory.”
Palacios-Huerta goes on to point to things like simply going first, if given the option (teams that kick first win 60% of the time); or knowing in which direction to pre-emptively dive, if you’re the goalkeeper, to save the potential winning shot. (Interestingly, the data in the chart below suggest there is little difference in success rates between shots that are aimed left, right or down the middle.)
Like penalty shootout strategy, we are always looking for ways to “improve the odds of victory" in helping our clients reach their wealth-planning goals. One of the many examples is keeping the cost of our investment approach low by using low-cost passive exchange-traded funds (ETFs).
Another example is using an asset allocation and portfolio diversification approach that smooths out the ride when equity markets get hammered. Other assets class, such as fixed income and alternatives, behave differently than equities and should zig when equities zag.
- Even within our equity investment approach, we believe it is best to diversify by including equities from the U.S., foreign developed and emerging markets. Though foreign developed and emerging market equities outperformed the U.S. last year, so far in 2018, the U.S. has dominated the World Cup of equity investing.
- Ben Carlson, author of the incredible Wealth of Common Sense blog, recently addressed the importance of investing globally and had this to say about the benefits of global equity diversification:
- Since 1970, the U.S. has outperformed the MSCI EAFE (Europe, Australasia and the Far East) 23 out of 48 calendar years (thus, foreign stocks have outperformed 25 of 48 years)
- The U.S. has outperformed over this entire period but it’s interesting to note that all this outperformance has occurred since 2010. From 1970-2009, the annual returns were 10.2% annually for the EAFE and 9.9% per year for the U.S.
- A portfolio split 70% in the U.S. and 30% in foreign stocks, rebalanced annually, would have given an investor an identical 10.5% annual return to U.S. stocks with a slightly lower volatility than each of the individual indexes themselves.
- The S&P had a lost decade from 2000 to 2009, falling almost 10% in total. In that time, the EAFE index rose almost 20% in total. Both are dismal returns for a 10-year stretch but 30% in relative returns is better than nothing.
- While it’s always difficult to hold onto or rebalance into a relative underperformer, diversifying reduces the regret from not owning the better performer of the two. So international diversification can provide psychological benefits beyond portfolio management considerations.
We could not agree more! Increasing the odds of a victory is important, whether it is kicking the match-winning penalty shot high and to the left or building portfolios with a committed allocation to equities outside the U.S.
Contact Russell Moenich to learn more about this topic.
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