My new column, “Does International Diversification Improve Safe Withdrawal Rates?” is now available from Advisor Perspectives.
International diversification is a relatively understudied topic in safe withdrawal rate studies. The classic studies usually just look at US stocks and US bonds. What’s more, when international diversification has been considered, it has (as far as I know) always been in the context of a US based investor.
In this new column, I focus on 50/50 portfolios of stocks and bonds using financial market data for 20 developed market countries since 1900. In the past, I have investigated this question assuming hypothetical investors in each country invested only in their local assets. Now, I also consider retirees in each country holding 50/50 globally diversified portfolios [meaning, 50% global stocks and 50% global bonds, GDP-weighted in each case] with returns calculated in terms of their local currency. These individuals do not hedge currency risk. Now we can see the impact of global diversification on withdrawal rate outcomes over rolling 30-year retirement periods.
Here are some key results:
- For 50/50 portfolios invested domestically, across the 20 countries the historical success rate for the 4% rule was only 65.7% [using this particular dataset, 4% worked 91.7% of the time for US retirees investing domestically]
- With globally diversified 50/50 portfolios, the global historical success rate for the 4% rule increased to 78.3%. For US investors, the global portfolio supported a success rate of 80.9%.
- Across the 20 countries, global portfolios supported higher withdrawal rates than domestic portfolios in 66.4% of cases. In the US, the split was even with global portfolios outperforming domestic portfolios precisely 50% of the time.
The article includes tables and figures that provide a lot more detail. As we can see, while global diversification helps more often than not, such diversification does not provide a complete panacea for market risk in retirement.
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