My March column in Investment Executive describes a talk one evening last fall in which I spoke to 200 investors, filling in at the last moment for a speaker who'd had to cancel because of a family emergency. 

I asked the audience to imagine that it was January 1 of 1970, forty years ago - and they had $100 to invest. They could put that $100 in one of six stock markets  -  the United States, Europe, Japan, Hong Kong, Canada and Australia. Further, they could divide it up in any way they wished - they could put it all into one market, divide it up evenly among the six or any combination in between.

How people invested

Given the statistics on home market bias and Canada's  recent performance, predictably Canada was the most popular choice.

 Its proximity and size made the US a favourite as well, with some investors putting money into Hong Kong and Australia. Almost no one put much of their $100 into Europe or Japan

The 40 year results

Then I shared the results of $100 invested in each market in 1970 forty years later, at the end of 2009:

Hong Kong           $33,000

Europe                 $6100

Canada                $5300

Australia              $4200

Japan                  $4000

United States       $3800

Lessons to take away

There were  six important lessons from this exercise:

1.     Don't ignore volatility along the way

When they saw the numbers, many of the audience indicated they'd changed their minds and said they'd increase their allocation to Hong Kong - until I showed them a chart of the incredible roller coaster ride that investing in Hong Kong has been, with 50% moves up and down common.

2.     Be aware of the recency effect.

 This is a phrase academics who study investor behaviour use to describe our tendency to place greater weight on more recent events. Japan has done incredibly miserably over the past twenty years and so got an almost zero allocation - because members of the audience had forgotten the eighties when the Japanese stock market  was the top market, multiplying fourteen times over.

3.     Be cautious about extrapolating from past performance                                                                 

Just because a stock market has done well in one period doesn't mean it will outperform in the next.

The United States is an excellent example. In the twenty years from 1980 to 2000, the American market was the top performing market with an amazing annual return of 18%, increasing 28 times over and even ahead of Hong Kong. By contrast, Canada and Australia had an average annual return of 11%, multiplying 8 times over in that 20 years.

Looking at this, you see the impact of the commodity exposure in Canada and Australia. But you also see the difficulty in extrapolating from one ten or even twenty year period to the next.

4.     Understand the impact of currency

If your clients have a short or even mid term timeframe, you need to be conscious of the effect of currency swings when investing globally.

One reason for the weak performance of the U.S. market  compared to the rest of the world  in the last ten years was the weak dollar. Even over longer periods, currency can have a big impact on both volatility and returns. In local currency, over forty years Europe's index grew  from 100 to  4770, still well ahead of the United States, but with a much narrower gap than when looked at in US dollars - simply because the US dollar was at an elevated level in 1970.

5.     Put the lost decade in perspective

There's been lots of commentary about the fact that the ten year period from 2000 to the end of 2009 was a lost decade for investors - and in fact the worst decade on record.

That's absolutely true if you're just looking at the United States. The fact is, however, that while returns may not have been sterling, over the past ten years investors have at least seen gains in most markets outside the U.S. market. We need to remember that while the U.S. market is still dominant, even after its miserable performance over the past ten years, it only represents about half of the global market capitalization - there's still the other 50% to take into account.

6.     Check the facts before acting on stereotypes.

When you talk about investing in Europe, most investors instinctively think of militant unions, stodgy beaurocrats, ossified companies and interventionist, sclerotic governments  - and yet over the past forty years investors in Europe have done substantially better than those in the United States.

Even more extraordinary, of the "big three" Euro countries - France, Germany and the United Kingdom - over the past forty years it's France that's turned in the best stock market performance and Germany the worst, exactly the reverse order that most investors and advisors would have guessed

And the most important conclusion from this exercise?

It's fine to have impressions and opinions - just be sure to check the facts before acting on those opinions. Unless you do that, even going back in time won't improve your investment performance.