Geographic Diversification Burgundy thumbnail.jpg
Research & Insights

Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

The best way we know to earn consistent returns and preserve wealth is to build portfolios that are as resilient as possible to the range of ways the world could unfold. To uncover vulnerabilities that are outside of investors’ recent lived experiences, we find it valuable to stress test portfolios across the various environments that have cropped up across countries throughout history.

One common vulnerability is geographic concentration. In the past century, there have been many times when investors concentrated in one country saw their wealth wiped out by geopolitical upheavals, debt crises, monetary reforms, or the bursting of bubbles, while markets in other countries remained resilient. Even without such extreme events, there is always a big divergence across the best and worst performing countries in any given period. And no one country consistently outperforms, as outperformance can lead to relative overvaluation and a subsequent reversal. Rather than try to predict who the winner will be in any particular period, a geographically diversified portfolio creates a more consistent return stream that tends to do almost as well as whatever the best single country turns out to be at any point in time. So geographic diversification has big upside and little downside for investors.

Geographic diversification is likely to be more important in the coming decades than it has been in our lived experience as investors. Through most of our working lifetimes, countries’ economies and markets have become increasingly intertwined due to globalization and the free flow of capital, under the auspices of the US as a dominant economic force and keeper of a stable global geopolitical order. Looking ahead, China’s ascent as an independent economic and financial center of gravity with an independent monetary policy and credit system is highly diversifying, making the world less unipolar and less correlated. At the same time, the rising risk of conflict within and across countries also increases the chances of divergent outcomes. Additionally, geographic diversification felt less urgent during the recent decade of great returns for most assets and portfolios. Low asset yields going forward make diversification and efficient risk-taking all the more important to investors.

To illustrate the impact of geographic diversification, we begin by looking at the characteristics of return streams from single countries relative to weighting a portfolio equally across countries, rebalancing annually. The chart on the next page shows cumulative returns above cash back to 1900 for the equity markets where we have reliable data going back over 100 years. An investor concentrated in Russia or Germany in the early 20th century would have lost most or all of their wealth, while an equally weighted mix of the five countries shown below does almost as well as the best performer.

Geographic Diversification Can Be a Lifesaver_chart01_REV_2_fo.svg

Looking at a broader set of stock and bond markets back to 1950, you can see that an equally weighted mix has consistently performed well. And while no single equity market has suffered as much as Germany and Russia did in the first half of the 20th century, there is still a broad range of performance across countries, with the US fluctuating like any other country. In the charts below, the gray lines represent individual countries, with the US called out in dark gray, while the equally weighted mix is shown in red.

Geographic Diversification Can Be a Lifesaver_chart02_REV_3_fo.svg

The geographically diversified portfolios do so well because they minimize drawdowns, creating a much more consistent return stream that allows for faster compounding.

Geographic Diversification Can Be a Lifesaver_chart03_REV_2_fo.svg

This basic picture holds through time regardless of the starting point, as shown in the following charts of the 10-year rolling return-to-risk ratio across individual countries and a diversified portfolio.

Geographic Diversification Can Be a Lifesaver_chart04_REV_3_fo.svg

Even when we create portfolios that are diversified across economic environments (what we refer to as an All Weather mix of assets, balanced to perform equally well when growth or inflation are rising or falling), there is significant value to adding geographic diversification (as we do in our own All Weather portfolios). The charts below repeat the first two perspectives we showed above, this time for country-specific All Weather mixes as well as our own geographically diversified All Weather asset mix.

Geographic Diversification Can Be a Lifesaver_chart05_REV_4_fo.svg
1 Where shown the Global All Weather Asset Mix and Country-Level All Weather Asset Mixes are simulated. It is expected that the simulated performance will periodically change as a function of both refinements to our simulation methodology and the underlying market data. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Past performnce is not indicative of future results. Please review the disclosures located at the end of the Daily Observations.

The Best and Worst Performers Naturally Fluctuate Through Time as Markets Move Toward Equilibrium Pricing

To get a better feel for what an investor would have experienced in any given period and how it compares to the longer-term range of outcomes, the table below looks decade by decade at how equity performance across countries stacks up. You can see the fluctuations through time; no one country is consistently outperforming, as outperformance can lead to relative overvaluation and a subsequent reversal. This decade, the US has been the best performer so far, but it was one of the weaker performers in the previous decade following the dot-com bust; it was one of the best performers in the 1990s, but before that you have to look back to the 1920s to find a decade in which US equity performance was better than middling.

Geographic Diversification Can Be a Lifesaver_table01_fo.svg
Geographic Diversification Can Be a Lifesaver_table02_fo.svg

Geographic Diversification Can Be a Lifesaver

There are plenty of instances in which geographic diversification has been a lifesaver, preventing wealth from being wiped out. Below, we show a few perspectives on this. For each country, we looked at its deepest drawdown and how long it took to recoup the losses. There are plenty of instances where a given country’s equity market was decimated, and it often takes decades to recover from the losses. Most countries have worse drawdowns in their history than the equally weighted portfolio has ever had, despite many of them having track records that are decades shorter.

The equally weighted stock portfolio took material losses at times, but experienced drawdowns that were shorter and shallower, and it tended to recover faster than most individual country equity markets.

Geographic Diversification Can Be a Lifesaver_table03_fo.svg

While we focused on the stock market above, investors can of course suffer material losses being concentrated in other assets as well. One particularly egregious example is German bonds from WWI, which lost 95% of their value relative to cash in the year or so after Germany surrendered. Despite earning more than a 900% excess return since then, investors concentrated in German bonds in this period have never recovered their wealth.

Geographic Diversification Can Be a Lifesaver_chart06v2_fo.svg

Geographic Diversification Is Likely to Be More Important in the Coming Decades Than It Has Been in Recent Decades

Over the past 40 years, economies and financial markets have been driven closer together by globalization and the free flow of capital, under the auspices of the US at the helm of the global economic and political order. So the past few decades of returns vastly understate the potential benefits of geographic diversification because of the unusual environment of high correlations across countries. As one indication of this, the chart below shows equity correlations across countries against the size of exports as a percent of the global economy back to 1825. The surge of globalization in the postwar era under US dominance, with rising trade and capital ties between countries globally, has led to unprecedented high correlations among the equity returns of different countries. In the past, there have been ebbs and flows in the pace of globalization—including a period of rising trade tensions culminating in the world wars—and of course we see rising anti-globalization sentiment resurging today.

Geographic Diversification Can Be a Lifesaver_chart07_fo.svg

Going forward, rising conflict around trade and globalization may increase divergences across countries. Additionally, China’s ascent as an important economic and financial center with divergent secular conditions from much of the developed world (e.g., more ability to stimulate in the event of a downturn) raises the likelihood of an increasingly multipolar and less correlated world. All of these forces raise the importance of diversification going forward. The table below reflects how lowly correlated the Chinese economy and its markets have been.

Geographic Diversification Can Be a Lifesaver_table04_fo.svg

At the same time, global portfolio exposure to China is tiny, though it is growing as Chinese markets gradually open up, making significant geographic diversification easier for investors to achieve.

Geographic Diversification Can Be a Lifesaver_chart08_fo.svg

Developed world investors are similarly under-allocated to the rest of the emerging world and tend to have a large home country bias, leaving them geographically concentrated overall. Below, we show an example of a typical US investor portfolio’s geographic exposure.

Geographic Diversification Can Be a Lifesaver_chart09_fo.svg


This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment or other advice.

The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on simulated, hypothetical or illustrative information that have inherent limitations. Unlike an actual performance record simulated or hypothetical results do not represent actual trading or the actual costs of management and may have under or over compensated for the impact of certain market risk factors. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.

Where shown, the All Weather asset mix performance is simulated by applying All Weather asset mix weights, which are determined by Bridgewater's proprietary process for building an environmentally balanced portfolio, to historical market returns. We use actual market returns when available and otherwise use Bridgewater Associates' proprietary estimates, based on other available data and our fundamental understanding of asset classes. In certain cases, market data for an exposure which otherwise would exist in the simulation may be omitted if the relevant data is unavailable, deemed unreliable, immaterial or accounted for using proxies. In the case of omitted markets, other markets in the same asset class, which represent the vast majority of our positions in each asset class, are scaled to represent the full asset class position. Simulated asset returns are subject to considerable uncertainty and potential error, as there is a great deal that cannot be known about how assets would have performed in the absence of actual market returns. The All Weather asset mix simulation is an approximation of our actual process but not an exact replication, and may have differences including but not limited to the precise mix of markets used and the weights applied to those markets. It is expected that the simulated performance will periodically change as a function of both refinements to our simulation methodology (including the addition/removal of asset classes) and the underlying market data. There is no guarantee that previous results would not be materially different. Future strategy changes could materially change previous simulated return in order to reflect the changes accurately across time.

Bridgewater research utilizes data and information from public, private and internal sources, including data from actual Bridgewater trades. Sources include, the Australian Bureau of Statistics, Barclays Capital Inc., Bloomberg Finance L.P., CBRE, Inc., CEIC Data Company Ltd., Consensus Economics Inc., Corelogic, Inc., CoStar Realty Information, Inc., CreditSights, Inc., Credit Market Analysis Ltd., Dealogic LLC, DTCC Data Repository (U.S.), LLC, Ecoanalitica, EPFR Global, Eurasia Group Ltd., European Money Markets Institute EMMI, Factset Research Systems, Inc., The Financial Times Limited, GaveKal Research Ltd., Global Financial Data, Inc., Haver Analytics, Inc., The Investment Funds Institute of Canada, Intercontinental Exchange (ICE), International Energy Agency, Lombard Street Research, Markit Economics Limited, Mergent, Inc., Metals Focus Ltd, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Renwood Realtytrac, LLC RP Data Ltd, Rystad Energy, Inc., S&P Global Market Intelligence Inc., Sentix Gmbh, Shanghai Wind Information Co., Ltd., Spears & Associates, Inc., State Street Bank and Trust Company, Sun Hung Kai Financial (UK), Thomson Reuters, Tokyo Stock Exchange, United Nations, US Department of Commerce, Wind Information (Shanghai) Co Ltd, Wood Mackenzie Limited, World Bureau of Metal Statistics, and World Economic Forum. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.

This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater ® Associates, LP.

The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.

Stay Informed
Sign up to receive our latest research on the forces shaping global economies and markets.
You're almost finished.
You will receive an email confirmation shortly.
There's been an error. Please start over and try again.
Stay Informed
Sign up to receive our latest research on the forces shaping global economies and markets.
Almost There!
We'd like to know you a bit better!
You're almost finished.
To complete your registration, click the confirmation link in the email we just sent you.
Sorry, there has been an error. Please start over and try again.

Disclaimer & Agreement


Bridgewater Associates, LP is a global investment management firm. Bridgewater Associates, LP advises certain private investment funds and institutional clients, and is not available to provide investment advisory or similar services to most other investors. This website is a resource for audiences other than investors such as potential employees, researchers, students, counterparties and industry participants. Bridgewater Associates, LP believes it is useful for such persons to have an accurate source of relevant information. Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of any offer to purchase, any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Offering materials relating to investments in entities managed by Bridgewater Associates, LP are not available to the general public.

To view this content, you must agree to the following terms, in addition to and supplementing the Bridgewater Terms of Use and Privacy Policy:

I confirm to Bridgewater Associates, LP and agree that:
  • I am entering this website only to obtain general information regarding Bridgewater Associates, LP and not for any other purpose.
  • I understand that investments managed by Bridgewater Associates, LP are not available to the general public.
  • I understand that this website does not contain the information I would need to consider for an investment, and that such information is only available to a limited group of persons and institutions meeting specified criteria.
  • I understand that this website has not been reviewed or approved by, filed with, or otherwise furnished to any governmental or similar authority, and is intended only to provide limited information to members of the public who have a legitimate interest in that information for reasons unrelated to making investments.
  • I understand that when Bridgewater Associates, LP makes third party information available, Bridgewater generally will not have verified statements made by the third party, and the presentation of information may omit important information.
  • I understand that third party materials such as live interviews made available by Bridgewater Associates, LP generally will not have been edited by Bridgewater and statements in those materials by individuals associated with Bridgewater should be understood in the conversational context in which they were made, which may include providing historical background.
  • The content constitutes the proprietary intellectual property of Bridgewater or its licensors and that I will not directly or indirectly copy, modify, recast, create derivative works, post, publish, display, redistribute, disclose, or make available the content, in whole or in part, to any third parties, or assist others to do the same, or otherwise make any commercial use of the content without the prior written consent of Bridgewater.

By registering my information below and clicking "Agree," I certify that I have read, understand and agree to the foregoing Disclaimer, Terms of Use and Privacy Policy.
This website uses cookies. Click here for additional details. By continuing to use this website, you consent to the use of cookies.

Internet Explorer is not supported by this website.

For optimal browsing we recommend using Chrome, Safari, or Firefox.