Financial Strategy, Second Edition

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The World was their Oyster: International Diversification Pre-World War I

Janette Rutterford

Bernstein (1996), in his history of risk, suggests that our forebears were relatively unsophisticated when it came to managing portfolio risk, or indeed quantifying it:

Throughout most of the history of stock markets – about 200 years in the United States and even longer in some European countries – it never occurred to anyone to define risk with a number. Stocks were risky and some were riskier than others, and people let it go at that. Risk was in the gut, not in the numbers. For aggressive investors, the goal was simply to maximise return; the fainthearted were content with savings accounts and high-grade long-term bonds. (p. 247)

Diversification, in the mid- to late nineteenth century, happened more through luck than judgment, as a means of enhancing income in the face of declining yields on British Government bonds. As overseas markets developed, with higher-yielding investment opportunities in their wake, so investors bought the securities on offer. Investment trusts and insurance companies, for example, bought bonds from different parts of the world, with very different risk characteristics, according to historical accident or opportunism. However, by the first decade of the twentieth century, British investors, both institutional and retail, had become more sophisticated in their approach to diversification. They were aware that holding a portfolio of international securities ...