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The World Ten Years Ago

The investment world a decade ago was a much, much different place. Japan could do no wrong, and the world’s worst-performing equity market over the period of 1970 to 1988 was the United States. Things have changed. For more than 10 years, falling interest rates and rising corporate profits have been a strong wind at the back of equities. Most countries have shown dramatically higher returns since 1988 than in the preceding 19 years.

The chart shows that the change has been most prevalent in the United States, although falling rates in European countries have boosted returns there as well. The relatively strong showing of Hong Kong may surprise, given the sharp drop in 1997. But one troublesome year can’t erase nine other generally prosperous years. The relatively weak performance of the Canadian market points out the benefit of international diversification. Another important factor has been the weakness of the Canadian dollar over the past 10 years. That has also made foreign investments look more attractive to a Canadian investor.

And then there’s Japan. Ten years ago, Japan was enjoying a remarkable boom. Economic growth was about 4 per cent a year. Inflation was negligible, at 1.1 per cent. Steady growth and low inflation, combined with Japan’s large investments in the emerging Asian economies seemed a perfect recipe for an incredible period of prosperity.

Ten years later, it seems difficult to believe there was incredible optimism about Japan at the time. Some of those underpinnings didn’t turn out to be as strong as expected, and the markets there have not done well for 10 years.

The past can only tell you so much about the future, and it’s always dangerous to try to make predictions. But here’s a safe one: the world will have a much different look again 10 years from now. The reason we present you with this data is to give you some insight into why we continue to recommend broad based global investments rather than country specific ones. In spite of different countries having difficulty over even long periods of time, broad based global equities have continued to perform well over the passed 30 years, and more. It also shows why now may not be the best time to sell your Canadian equity investments for U.S. based ones since the U.S. over performance will not continue indefinitely.

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