How to Build a Global Investment Portfolio for the Next Decade

The World Portfolio encompasses virtually all the globe’s investable assets and is an important influence on how money is allocated. A version of it usually serves as a benchmark for most multi-asset portfolios. When investors plan an ideal portfolio for the next decade, they may very well use the World Portfolio as a guide.

Tracking this $250 trillion benchmark, which amounts to around 200% of global GDP, might seem like the supremely diversified portfolio. But just following market value-weighted, multi-asset benchmarks isn’t necessarily a good idea, says Christian Mueller-Glissmann, head of asset allocation in Goldman Sachs Research.

In some respects, Mueller-Glissmann says this proxy for the global markets isn’t diverse enough because it is dominated by the largest assets.

For example, the World Portfolio misses out on promising assets in emerging markets, commodities, and alternatives such as private markets, according to Goldman Sachs Research. While not all are readily tradable and some may lack transparent market values, the size of the actual investment universe can theoretically be further increased by including things like residential real estate, farmland, collectables, or even intellectual property.

“This is the ultimate passive portfolio, and benchmarking might be easy and cost efficient, but it isn’t necessarily the best approach to multi-asset investing,” Mueller-Glissmann says of the World Portfolio. “It’s backward looking and often overlooks diverse assets in favor of those that don’t deserve the weightings they get.”

A number of simple asset allocation approaches have outperformed the World Portfolio over longer time horizons. A portfolio of 60% stocks and 40% bonds, for example, had a better risk-adjusted return (Sharpe ratio) since 1950. After the Covid-19 pandemic, the optimal portfolio, in hindsight, shifted to roughly 50% in US equities and 50% in gold. This illustrates the potential opportunities to deviate from benchmarks even for long investment horizons

What’s the best investment portfolio for the next 10 years?

Goldman Sachs Research used a technique called “strategic tilting,” which increases allocations to assets starting from a benchmark based on prospective Sharpe ratio improvements. Our analysts use strategic tilting to incorporate return forecasts, extract implied returns from the current benchmark, and compare current World Portfolio weights to optimized weights that are realistic for practical use.

Goldman Sachs Research recommends several strategies to improve the risk and reward versus the World Portfolio by managing the mix of equities, bonds and gold, as well as the exposure to US assets (including foreign-exchange hedging).

In one approach, actively adjusting (or strategic tilting) the mix of equities, bonds, and gold may improve risk-adjusted returns versus the World Portfolio benchmark. Mueller-Glissmann says the World Portfolio’s current, roughly 50%, weighting of global stocks “does not look unusually high or low.” Since 1900, equities have generally outperformed bonds by an average of close to 4-5% per year.

However, the portfolio’s current weighting of gold, of around 5%, is much lower than recent optimal levels, according to Goldman Sachs Research. This indicates that the World Portfolio has been vulnerable to inflationary pressures. Inflationary shocks often spur drawdowns (a decline in a portfolio’s value) from 60/40 portfolios and point to more benefits from allocations to real assets such as gold.

A second way to further improve the World Portfolio may include international diversification to reduce US asset dominance and actively managing foreign-exchange risk.

The World Portfolio’s large weight of US equities, when compared with historical strategic tilts, suggests US stocks will continue to outperform non-US equities by approximately 4-5% over the next decade. This is consistent with the US stock market’s run since the financial crisis in 2008.

Yet Goldman Sachs Research’s global strategy team recently highlighted how higher US equity valuations and greater concentration in mega-cap stocks may warrant international diversification. “It might be difficult for US equities to sustain their outperformance with less of a tailwind from valuations, earnings, and the dollar,” Mueller-Glissmann says.

At the same time, Goldman Sachs Research expects the US dollar to depreciate against other major currencies in the coming months. Going forward, non-US investors will have to more closely consider currency-risk in the portfolios, Mueller-Glissmann says. Also, foreign exchange in emerging markets might become more of a tailwind for related assets in coming years.

Investments in emerging market assets, gold, or a safe source of foreign exchange such as the Swiss franc can also lower US-dollar risk. Emerging market assets are negatively correlated with the US currency, and sectors such as China’s technology firms may help diversify disruption risks for mega-capitalization US technology companies.

Using alternatives can enhance performance and manage risk

And finally, investors can also improve risk-adjusted returns using alternative assets that lie outside benchmarks. For example, private markets have grown significantly and may enhance returns with less volatility by actively managing the underlying assets.

“We think the benefits from allocations to smaller assets and alternatives are likely to increase in the medium term again, both from relative performance and lower correlations,” Mueller-Glissmann says.

Investors can also isolate specific areas within equities (for example, certain styles and sectors), to improve the risk/reward of the World Portfolio. For example, low volatility stocks can diversify the market concentration risks stemming from US growth and tech stocks. Also, there are potentially more diversification benefits going forward from hedge funds and selective liquid alternatives, which tend to have low correlations with the World Portfolio and often have better Sharpe ratios, especially in crises.

Is active investing better than passive investing?

Over the last 25 years, the idea of market efficiency (coupled with lower fees and mixed performance of active managers) has supported the growth in passive investing based on benchmarks. More than half of assets under management in equity funds are now passive, and similarly the World Portfolio helps guide strategic asset allocations for multi-asset investors.

“It’s not a bad starting point, but we think multi-asset investors can do better,” Mueller-Glissmann says of the World Portfolio. “Asset allocation should not be entirely passive. There is definitely value to be added with active management techniques.”

Benchmarks such as the World Portfolio remain influential but can be enhanced by applying a strategic tilting framework to adjust its asset allocations, managing regional concentration and FX risk as well as incorporating alternatives, he says.

“Multi-asset investors should look beyond benchmarks and focus on selective opportunities from market timing and diversification,” he says. “In the medium-term we want to capture innovation, protect from inflation and improve risk mitigation. This framework is a realistic step to achieving this goal.”

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.