Long-Term Stability in an Unstable World

A Scientific Framework for Global Investors in Germany

1. The New Reality of Zero Interest Rates

The classical rule of modern finance—“higher returns require higher risk”—is increasingly misleading for long-term investors. Andreas Beck’s analysis demonstrates that, in a zero-interest-rate environment, traditional risk management systematically destroys returns. Over the last 30 years, falling bond yields masked this problem: price gains from government bonds compensated for weak equity exposure. That era is over.
With risk-free returns near zero and inflation persistent, the tolerance for systematic underperformance must be zero.

Beck’s data show that conventional risk controls—reducing equity exposure after losses and increasing it after gains—produce cyclical buying high and selling low. Backtests reveal that this behavior explains most of the performance gap between active managers and passive benchmarks over multi-decade periods.

2. From Short-Term Volatility to Long-Term Capital Efficiency

Traditional risk metrics such as Value at Risk or short-term volatility were designed for banks closing positions over days or weeks. They are meaningless for investors with 20- or 30-year horizons.
Beck instead proposes a capital-efficiency metric: return on invested capital (ROIC). Compound growth, not volatility, determines long-term financial security.

A portfolio’s safety therefore stems from its ability to recover—its resilience of earnings and reinvestment capacity—not from minimizing temporary fluctuations.

3. The Concept of Ultrastability

Beck extends systems theory into finance. In cybernetics, ultrastable systems adapt to shocks by reorganizing themselves into new, functioning equilibria rather than collapsing. The global economy, seen as a network of companies competing for capital, displays precisely this behavior.
Crises eliminate weak firms (“creative destruction,” Schumpeter) and increase long-term profitability among survivors.

The implication:

The world economy as a whole is ultrastable—it survives and adapts through crises, even though individual companies perish.

Hence, broad diversification across thousands of companies is the only structure that fully benefits from this systemic property. Selective, concentrated portfolios are not ultrastable—they depend on predicting which firms will survive the next shock.

4. Designing an Ultrastable Portfolio

Beck models a portfolio covering 98 % of the world’s equity capital—roughly 6 000 companies—weighted not only by market capitalization but also adjusted by profitability (return on equity). This avoids concentration in overvalued regions (e.g., the U.S. during tech bubbles) and redistributes exposure toward higher-efficiency economies.

The result is a globally diversified equity base, complemented by safe bonds as “investment reserves” that can be deployed anticyclically when equity capital becomes scarce during crises.

Empirical backtests from 1959 to 2019 show that this anticyclical adjustment adds a persistent 0.6 % annual outperformance versus a constant 80/20 benchmark.
Over any 15-year period—including major crises such as 2002 and 2008—the dynamic strategy outperformed the static portfolio in 100 % of cases (see Table 1 and Figures 1–3 in the study).

5. The Anticyclic Factor: Profiting from Fear

The study formalizes an “Anticyclic Factor” that increases equity exposure during panic and reduces it during euphoria. Using regime modeling:

• Regime A: Normal markets → 80 % equities
• Regime B: Equity scarcity → 90 % equities
• Regime C: Crisis escalation → 100 % equities

Transitions are triggered by > 20 % market drops, surges in volatility, or widening credit spreads. Over 60 years, this disciplined timing produced not only higher returns but lower long-term risk, since the portfolio accumulated shares at favorable valuations and reinvested in recovery phases.

6. Empirical Evidence: The 2002 and 2008 Crises

Backtests using global market proxies (MSCI World and ACWI) show that the anticyclic model’s relative return grew most strongly during recessions. In the 2008 crisis, when static 80/20 portfolios lost ~40 %, the ultrastable model’s subsequent 15-year cumulative return exceeded +200 %, versus ~160 % for the benchmark.

Beck’s simulation of all rolling 15-year windows found that even with extreme crises, 95 % of outcomes still compensated for inflation and taxes—a statistically remarkable level of robustness.

7. Return on Capital and the Economics of Fear

Corporate profitability (Return on Equity) remains remarkably stable: typically 10–15 % globally, even through recessions. In contrast, stock prices swing violently as investor sentiment oscillates.
By comparing smoothed ROE with price-to-book ratios, Beck identifies the best entry points—where the market undervalues productive capital by more than 30 %.

For example:

• In 2009, average global ROE = 14 %, P/B = 1.0 → expected investor return ≈ 14 % p.a.
• In 2019, ROE = 12 %, P/B = 3.5 → expected investor return ≈ 3–4 % p.a.

Thus, crisis periods mathematically deliver the highest future returns, contradicting the emotional instinct to reduce risk exposure.

8. Credit Spreads as Early Warning Indicators

The study correlates credit spreads (corporate bond yields vs. government bonds) with expected equity returns:

• Correlation = 0.80 (USA) and 0.84 (Europe) between spreads and equity capital profitability from 2001–2019.
  When BBB-rated spreads widen sharply—as in 2002 and 2008—future equity returns surge correspondingly.
  Expats monitoring these indicators can identify when to increase equity allocations with confidence in systemic recovery.

9. Comparison: Ultrastable Strategy vs. Active Mixed Funds

Using 20 years of data (1998–2019), Beck compared ultrastable portfolios with aggressive global balanced funds (Morningstar EUR Aggressive Global). Results:

Despite higher short-term volatility, the ultrastable approach achieved +3.7 % annual excess return, recovering faster and compounding wealth roughly 3× faster than the peer group.

10. Why It Works: Systemic vs. Idiosyncratic Risk

Beck’s framework reframes risk as systemic adaptation capacity, not short-term loss probability.
The global economy’s ultrastability means it self-organizes after crises—while individual firms or sectors may collapse, aggregate profit levels revert to the mean.

Therefore, the rational expat investor should:

• Own the whole system (global equity index, 6000 firms).
• Accept short-term volatility as the price of long-term certainty.
• Rebalance anticyclically, not reactively.
• Avoid expensive or opaque products that suppress volatility at the cost of compounding loss.

11. Implications for Expats in Germany

For expatriates, these insights are critical. German financial culture remains conservative—bank deposits and insurance contracts dominate, with minimal equity ownership.
Yet with risk-free yields near zero and inflation near 2–3 %, the real return on deposits is negative. Only diversified global equity exposure can realistically fund retirement goals.

An ultrastable, anticyclic strategy allows expats to:

1. Build wealth globally while residing in Germany.
2. Protect purchasing power against euro-specific risk.
3. Benefit mathematically from global economic adaptation rather than fear cycles.

12. Quantitative Summary

These results show that systematic discipline outperforms tactical flexibility—a rare empirical conclusion confirmed by six decades of data.

13. Conclusion: Rational Optimism as a Strategy

For expats building retirement capital in Germany’s low-yield world, Beck’s findings lead to a clear, scientific principle:

“Long-term safety emerges not from avoiding risk, but from accepting it systematically through globally diversified, anticyclic participation.”

In an ultrastable global system, crises are not threats—they are opportunities for capital efficiency.
Mathematically, fear is overpriced and patience is under-rewarded.
By embracing the logic of ultrastability, expats can achieve what short-term traders cannot: statistical certainty through disciplined exposure.

Sources:
Beck, A. & Ritter, A. (2019). Ultrastabilität: Risikomanagement für die lange Frist. Institut für Vermögensaufbau (IVA) AG.
Data: MSCI ACWI 1959–2019; Morningstar Aggressive Global EUR Funds; OECD and Federal Reserve Data.

Research

At Finanz2Go, our consulting approach is grounded in independent research and quantitative analysis. We build upon leading financial studies to help our clients make informed, evidence-based decisions about investments, pensions, and risk management in Germany. Below is a selection of research insights we’ve summarized and translated for our international

Independent Financial Consulting GermanyFabian Beining / Founder Finanz2Go