December 20, 2014

3-Year Freedom Investing Returns

In Freedom Investing 2012 I analyzed the latest Index of Economic Freedom from The Heritage Foundation. Here I present some of the analysis for returns over the past 3-years.

I took 17 of the developed countries with the largest investable markets and compared their current economic freedom score with their returns over the past 1, 3, 5 and 10 years. Only five of these countries are ranked in the free category: Hong Kong, Singapore, Australia, New Zealand and Switzerland. Canada moved from free to mostly free this year. Two years ago the United States fell out as well.

The nations in my analysis included 17 different developed countries representing 85% of the world’s investable markets and 98% of the developed countries. Freedom scores ranged from #1 in freedom Hong Kong at 89.9 to #92 ranked mostly unfree Italy at 58.8.

The three year returns were very good for the global markets but the MSCI EAFE index was only up 7.65% while the emerging markets index was up 20.07%.

Freedom Italy 3yr 2012 01

The six countries with the most economic freedom (Hong Kong, Singapore, Australia, New Zealand, Switzerland and Canada) averaged 17.58% beating the MSCI EAFE Index by 9.93%. Here is a chart showing each country’s 3 year return:

Freedom 3yr 2012 01

Freedom investing boosted returns significantly over the past three years. Looking at the 3-year returns of all 17 of the developed countries in the analysis verses their current freedom index show the following correlation:

1-Year Returns vs. Freedom

The equation of the trend line shows that every point on the freedom index was worth 0.80% annual return over the past year.

The United States’ 2012 Economic Freedom score is now 76.3, down 1.5 from last year. The United States has been dropping in economic freedom since peaking at a score of 81.2 in 2007. Dropping 4.9 points on the freedom index is the equivalent of dropping 3.92% in expected future returns given the past  three year’s correlation.

We believe this is one of the times when your asset allocation should tilt foreign and overweight the handful of countries with high economic freedom. Although many economists acknowledge that freedom matters, few investment strategies take advantage of this fact.


Disclosures: Our firm has been over weighting countries with the most economic freedom for several years. New subscribers to our blog receive free access to a 1.75 hour video presentation on “Where in the World to Invest?

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About David John Marotta

David John Marotta+ is the Founder and President of Marotta Wealth Management, Inc. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

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