24/08/2024
📈 A Blueprint for Lasting Wealth
In the 1960s, Norway discovered oil, transforming from a small fishing nation into a major oil & gas producer.
Recognizing the finite nature of oil reserves, instead of spending all the oil revenue, Norway established the Government Pension Fund Global (GPFG) in 1990 to:
• Invest this wealth for future generations
• Shield its economy from oil price fluctuations
• Invest abroad to avoid overheating its economy
• & spread investments globally to diversify risk.
Fast forward to today, the fund is:
• The world’s largest sovereign wealth fund, valued at ~$1.7 trillion.
• Holds shares in about 9,000 companies worldwide, owning an average of 1.5% of each.
• Invested in global stocks (72%), fixed income (26.2%), real estate (1.7%), & renewable energy (0.1%).
• Generated an annual return of 6.30% since Jan-1998.
• Now worth over $307,000 per citizen.
• Spends only the equivalent of the real return, estimated to be around 3% per year, which still covers nearly 20% of the national budget.
🧐 Can we invest like the GPFG?
While we can’t exactly replicate the scale & scope of the GPFG, investing in ETFs with low expense ratios could be a practical way for us to mimic its diversified, long-term approach. For eg:
• Vanguard Total World Stock Index Fund ETF (VT) & iShares MSCI ACWI ETF (ACWI) provide global stock market exposure in a single fund.
• Vanguard Total World Bond ETF (BNDW) offers broad, diversified exposure to global investment-grade bonds.
A quick test using PortfolioVisualizer with 70% in global stocks & 30% in global bonds from January 1998 to July 2024 shows the following results:
• Annualized return: 6.85%
• 5-year annualized return: 7.81%
• 10-year annualized return: 6.81%
📖 Lessons for Investors:
✔️ Rather than spending all our income or depending solely on it, investing our savings globally like the GPFG can help us grow our wealth & diversify risk.
✔️ Maintaining a long-term perspective, discipline, & staying invested regardless of economic or market conditions will not only help us weather short-term fluctuations but also prevent interruptions in the compounding process.
