International Investment for Retirement Savers: Historical Evidence on Risk and Returns
AbstractAn important decision facing retirement savers is how to allocate their savings across different assets. The decision includes the choice of how to divide investments between domestic and foreign holdings. This study uses return data for 1927-2005 to determine whether cross-border investing in the past would have been advantageous to retirement savers in eight large industrialized countries. By assumption investors can buy mutual fund shares in index funds for stocks and bonds in their home country and in any of seven foreign countries. The mutual funds’ foreign holdings are not hedged to protect investors against currency fluctuations. The paper’s goal is to determine whether workers in the eight countries would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds. Consistent with past theoretical and empirical findings, the results show that workers could have improved expected financial performance by investing in foreign as well as domestic equities. Remarkably, retirement savers in nearly all countries would have obtained higher average pensions with a 100% foreign allocation than with a 100% domestic allocation, even if they followed extremely naïve strategies in allocating equity investments across different foreign markets. For retirement savers in most countries, though not the United States, naïve overseas investment strategies would also have reduced the risk of catastrophically poor investment performance. In all countries, retirement savers who selected a global portfolio allocation along the efficient frontier could obtain better average pensions with lower risk of very small pensions than savers who restrict their investments to the domestic stock and bond funds.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2007-05.
Length: 40 pages
Date of creation: Feb 2007
Date of revision: Feb 2007
Contact details of provider:
Postal: Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/
More information through EDIRC
cross-border investing; foreign stocks; bonds; domestic allocation; equities; investments; foriegn;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Glen, Jack & Jorion, Philippe, 1993. " Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-86, December.
- Peter A. Abken & Milind M. Shirkhande, 1997. "The role of currency derivatives in internationally diversified portfolios," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 34-59.
- Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997.
"An Asset Allocation Puzzle,"
American Economic Review,
American Economic Association, vol. 87(1), pages 181-91, March.
- Campbell, Rachel A. & Kräussl, Roman, 2006.
"Revisiting the home bias puzzle: Downside equity risk,"
CFS Working Paper Series
2006/31, Center for Financial Studies (CFS).
- Campbell, Rachel A. & Kraussl, Roman, 2007. "Revisiting the home bias puzzle: Downside equity risk," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1239-1260, November.
- Gary Burtless, 2000. "Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History," Discussion Papers of DIW Berlin 211, DIW Berlin, German Institute for Economic Research.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
- Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The performance of international portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.).
- Carlos León & Juan Mario Laserna, 2008.
"Asignación Estratégica de Activos para Fondos de Pensiones Obligatorias en Colombia: Un Enfoque Alternativo,"
BORRADORES DE ECONOMIA
004970, BANCO DE LA REPÚBLICA.
- Carlos Leon & Juan Mario Laserna, . "Asignación Estratégica de Activos para Fondos de Pensiones Obligatorias en Colombia: Un Enfoque Alternativo," Borradores de Economia 523, Banco de la Republica de Colombia.
- Musalem, Alberto R. & Pasquini, Ricardo, 2012. "Private pension systems : cross-country investment performance," Social Protection Discussion Papers 68937, The World Bank.
- W Pfau, 2009.
"The Role of International Diversification in Public Pension Systems: The Case of Pakistan,"
Economic Issues Journal Articles,
Economic Issues, vol. 14(2), pages 81-106, September.
- Pfau, Wade Donald, 2009. "The Role of International Diversification in Public Pension Systems: The Case of Pakistan," MPRA Paper 19037, University Library of Munich, Germany.
- Pfau, Wade Donald, 2009.
"Emerging Market Pension Funds and International Diversification,"
19039, University Library of Munich, Germany.
- Wade D. Pfau, 2008. "Emerging Market Pension Funds and International Diversification," GRIPS Discussion Papers 08-10, National Graduate Institute for Policy Studies.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski) or (Christopher F Baum).
If references are entirely missing, you can add them using this form.