After some years of mediocre returns on my savings I decided to explore evidence-based decision rules for investing in international funds. Briefly explained, I collected the best public information that I could find and used it in econometric and statistical analysis to rank countries according to their likelihood of being “good” investment options in any given quarter.
The figure shows the simulated total return on one euro invested in the highest ranked country according to EBI rules. To perform the simulations two scenarios were considered. In an “unlucky” scenario the initial investment was assumed to occur in the fall of 2007 when stock markets around the world were at their peak: buying at that moment was a bad idea. In a “lucky” situation the initial investment was assumed to be made after the 2008 financial crises and when stock prices had bottomed out, i.e. in the first quarter of 2009.
By September 2015 the average annualized return obtained with EBI in the unlucky and lucky scenarios were 30% and 49%, respectively. Such rates are significantly larger than the ones observed in the stock market over long spells (i.e. several years). Using data from the unlucky scenario, Monte Carlo methods show that the 95% confidence interval for the mean annual return is 23% - 47%.
Admittedly, this is only a retrospective account of facts based on simulations. It shows the return that would had been obtained following a set of rules established ex-post. Only a prospective analysis where investment decisions are taken ex-ante can tell whether evidence-based rules work in practice or not. I started a prospective analysis in October 2015. The best countries or regions to invest according to the EBI (out of 41 Morningstar categories) and those ranked last are presented in the table. As a reference, the actual ranking of the country/region is shown in parenthesis.
Best and worst investment options according to EBI
(actual ranking among 41 country/regions in parenthesis)