It is a simple thought experiment. Would you rather invest in South Korea, “a world leader in electronics, telecommunications, automobile production, and shipbuilding,” or in North Korea, where “corruption is endemic at every level of the state and economy”? The obvious choice is South Korea. Making the choice to favor the free countries of the world over their more repressed counterparts is freedom investing.
For over a decade, we’ve been advocating freedom investing, the idea that investing in countries rated high in economic freedom should produce better returns than investing in countries with more controlled or repressed economies.
Every year the Heritage Foundation evaluates all the world’s countries using their Index of Economic Freedom, where a high score correlates to nearly every positive measure of a country. We use this ranking and efficient frontier analysis to craft our Foreign Stock investment strategy that we call “Freedom Investing.”
Some investors have a strong bias towards investing in their home country, but the same benefits that arise from other portfolio diversification are there for global diversification.
Here in America, that means many investors have a strong bias towards investing in only the United States. Although indiscriminate foreign investing may under perform the United States, diversification among the other free countries provides a more consistent return than investing only in the United States.
Historical returns seem to favor the countries in Heritage’s free category.
Overcome Your Biases and Invest Globally
Home bias is the tendency of investors to invest a majority of their assets in companies domiciled in their home country. Recency bias is the tendency for humans to believe that what has happened recently will continue to happen in the future.
Risk-Return Analysis of Freedom Investing
In this article, I am reviewing the quantitative measurements and performance metrics of Freedom Investing to see how its risk and return compare to the EAFE Index, its benchmark.
A 25-Year Review of Freedom Investing
These findings together demonstrate how Economic Freedom seems to have been a valid factor for higher expected returns than investing in the EAFE Index alone.