Our friends at Dimensional Fund Advisors graciously provide us with a robust and detailed review of the world capital market performance. For readers who want to look more deeply under the hood, this is a comprehensive, yet accessible, review.
Attached is their Quarterly Market Review. The report includes: a global overview, timeline of events, and the returns of asset classes in both US and international markets. Also included are returns for globally diversified index portfolios for a number of different global stock/bond mixes, highlighting the benefits of diversification.
On the last page is discussion of how to incorporate and manage the Emerging Markets asset class in a portfolio. Historically, emerging markets have been both a good diversifier (with a relatively low correlation to US equities) and have had higher risk premiums. But they come with much higher volatility, reflecting the typical risks (political, corporate governance, etc.) of less developed countries. We recommend seasoning portfolios with small doses of emerging markets, the way you would with chili peppers; just enough to kick it up a notch, but not so much to choke on.
