Re: Investments

Robin Hanson (hanson@hss.caltech.edu)
Thu, 22 May 1997 11:00:46 -0700 (PDT)

Hal Finney writes:
>The thing I keep hearing is that the stock market's performance over the
>last 10 years or so has been unusually good compared to historical
>averages. The implication is that stocks would be expected to underperform
>over the next decade, either returning to their average growth rates
>or possibly even falling lower to compensate for the recent spurt. If
>this is right, then the stock market, particularly the index averages,
>may not be the place to be, unless your time horizon is very far out
>(20-40 years).

Is this about the U.S. or the world? If about the U.S., it might be a
good time to invest abroad.

Its worth pointing out that if the value of your future wages is tied
to the U.S., because of your knowledge and contacts in the U.S., and
if U.S. wages correlate with U.S. stock returns, as they seem to, then
diversification would argue for putting more of your money abroad,
perhaps to the point of holding no U.S. investments.

See: Baxter & Jermann, "The international diversification puzzle is
worse than you think", American Economic Review, March '97, p. 170.

Of course if you're betting instead of investing, then you may prefer
to bet on things you know best.

Robin D. Hanson hanson@hss.caltech.edu http://hss.caltech.edu/~hanson/