Quick Bites | Country Risk and Long Term Returns

Ray Dalio, the billionaire and founder of the world’s largest hedge fund, Bridgewater, recently wrote a book titled “Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail”.

In the book, Dalio conducts an interesting thought experiment. Imagine if you went back in time to 1900 without any knowledge about the present and you wanted to invest. One logical way of doing so would be to look at the top 10 great powers in 1900 and then invest in those countries. The rationale for doing so is that virtually any one of these countries was or could have become a great and wealthy country, and they would all be reasonable places for one to invest, especially if one wanted a diversified portfolio.

And yet… “Seven of these 10 countries saw wealth virtually wiped out at least once, and even the countries that didn’t see wealth wiped out had a handful of terrible decades for asset returns that virtually destroyed them financially”. — Ray Dalio

Source: Changing World Order, Ray Dalio


Note the infographic records major investment return failures (more than -40%) for a portfolio of 60% equity and 40% bonds, after inflation, across 20 year time periods in the 100 years 1900 to 2000.

It is pleasing to see that neither the US nor Australia appears! Indeed, the US has never had a period of 20 years when returns for equities have been negative, and neither has Australia. Nevertheless, a risk many investors overlook is country risk, and it pays to diversify geographically. For Australians to have 70% or 80% of their equity exposure tied only to Australian companies, when our economy makes up less than 3% of the global economy, probably makes little sense.

For the record, Australian equity investors have done extremely well over the long term, and we expect will continue to do well.

No negative returns for Australian investors over 10 years

Data is unfortunately only for the last 50 years (1970 to 2021).

Source: Vanguard


Australian shares have delivered an average of 10% per annum (before inflation) over the last 100 years.

Source: RBA



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