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10-year retrospective: What a decade of returns tells us about passive investing

This post is one of a series looking at returns in the decade after the financial crisis.

I was finishing my basic education in passive investing as the Global Financial Crisis (GFC) shook capitalism. It didn’t feel like the best time to put my financial house in order but – on the off chance that the sky wasn’t falling in – I was learning as much as I could as fast as I could.

Then as now there was no shortage of pundits, authors, superstars, and salesmen laying out their ideas. The market stalls were festooned with promises:

  • All-weather diversification!
  • Superior risk-adjusted returns!
  • Negative correlations!
  • Cheap fundamentals!
  • Megatrends!

My head span as I inhaled the aromas of green energy, soft commodities, precious metals, small caps, and high yields.

Which of these spices would add zing to my mix?

Only a few index trackers had a long-term history when I emerged from my bolthole in 2009. There was no way to verify their behaviour1 over the all-important ‘long term’.

But now you can.

Tracking the trackers

The Cambrian explosion of index trackers is more than a decade old. We can now see how closely the longer-toothed ones have matched up to the theory and promise.

The charts that tell our story come from Trustnet.

Trustnet provides annualised and cumulative return data for periods of up to 10 years. The results below are quoted in nominal £ returns, with dividends reinvested from 14th September 2009 to 13th September 2019.

Subtract 3% average inflation to convert the nominal returns into real returns.

The case for global diversification

Global market returns 2009 - 20019

If I’d been an investing clairvoyant 10 years ago then my name would have been Jack Bogle. Like the father of the index fund, I’d have put everything into a US stock market tracker and subsequently reaped the rewards of one of the great bull markets.

That skyrocketing green line on the graph above is Vanguard’s US Equity Index fund. It returned an astonishing 16.3% annualised. Any US assets you owned in 2009 have soared by a cumulative 350% (see the 10y column in the table).

Perhaps they’re pumped by quantitative easing and corporate tax cuts. Maybe the social dividend has been inequality and the rise of populism. Whatever the case, as investors in the US market we should acknowledge we’ve lived through extraordinary times.

Back in 2009, as a UK investor without the witch-sight, I diversified across every major geographic region on the good ship Earth. And nobody should be sorry if they did that because the iShares MSCI World ETF2 brought in a still exceptional 12.1% annualised and 214% cumulative return. (See the brown E line on the graph).

That’s a 9% annualised real return versus the historic average of around 5%.


Note that hard as it will be for newer passive investors to fathom, there weren’t any vanilla all-world trackers available in 2009. The MSCI World bought you exposure to developed world stock markets only.

Most of those other markets chased the US like perfectly nippy sprinters trailing Usain Bolt:

  • The supposedly moribund Japan returned 8.5% annualised.
  • The iShares UK Equity Index Fund – tracking the FTSE All-Share – delivered 8.3%.
  • Europe also scored 8.3% as it dodged the gloomy prophecies of a Euro area implosion.3

The big story in 2009 was the ascent of the emerging markets and I agonized over whether and how to reflect this in my portfolio.  The West was doomed to low growth and the future belonged to the BRICS4 said the talking heads, plus any other developing nation that clustered under memorable acronyms like MINT.

Put yourself into the position of a pundit in 2009. The emerging markets had notched 18.7% annualised between 1988 and 2006 and their acronym-powered growth seemed unstoppable.

But then the brakes went on. These next-big-things posted a relatively poor decade and trailed the developed world, as you can see from the yellow B line on the graph. The emerging markets could only muster 6.6% annualised (3.6% real return after inflation). All-mighty China forked over a measly 5% annualised return (2% real).

Frontier markets (see pink line G) were another smart money bet in 2009. They were the new emerging markets, it was said. Highly volatile yes, but a diversification play because their economies were less integrated into the global mainstream.

Thankfully wiser voices preached caution. More than a decade ago the sage Bill Bernstein explained that economic performance and stock market success don’t always go hand-in-hand:

During the twentieth century, England went from being the world’s number one economic and military power to an overgrown outdoor theme park, and yet it still sported some of the world’s highest equity returns between 1900 and 2000.

On the other hand, during the past quarter century Malaysia, Korea, Thailand and, of course, China have simultaneously had some of the world’s highest economic growth rates and lowest stock returns.

In even simpler terms, just as growth stocks have lower returns than value stocks, so do growth nations have lower returns than value nations – and they similarly get overbought by the rubes.

This is why hot tips are so often a reverse signal for contrarians. When a story is obvious it often collapses under the weight of expectation.

Ten years later and the frontier markets have returned 6.6% annualised – the same as emerging markets.

The graph also shows that the world’s equity markets have been highly correlated, too. They’ve zigzagged together, although the emerging and frontier markets have been sickeningly volatile.

Many shall fall that are now held in honour5

The global portfolio did not score you the best result over the last decade, and it never will.

But the most powerful geopolitical narrative 10 years ago would have sent you in precisely the wrong direction.

The equivalent story in 2019 is to go all-in on the US. It’s the global hyperpower with an incredibly flexible economy blah blah blah, all-conquering tech industry yadda yadda. But don’t commit the cardinal sin of projecting the 10 years forever forward. Ben Carlson has shown how the pendulum has swung back and forth.

The US lagged the rest of the developed world in the 1980s and 2000s while surging head in the 1990s and 2010s. Trends mean revert and commentators have been calling the US market frothy since 2011.

This short piece by Jonathan Clements gives you a 20 year perspective. It is an even starker warning against recency bias.

Looking back 10 years doesn’t tell us what will happen in the next decade, but it can help us remember that basing our decisions on predictions and compelling stories is a mug’s game.

I’ve been called worse things than that, but sooner or later the commentators are liable to be right.

Take it steady,

The Accumulator

Public service announcement: October is going to be sentimental around here, as we continue to gaze back 10 years and see how several other passive-friendly strategies have fared. Subscribe to get all misty eyed with us.

  1. Never mind the fact we all know that past performance is no indicator of future results. []
  2. The iShares MSCI World ETF is currently more than three-fifths invested in US companies, anyway. []
  3. I kept Europe off the graph for simplicity’s sake. []
  4. Brazil, Russia, India, China, and South Africa. []
  5. Horace. []

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{ 23 comments… add one }
  • 1 jim October 1, 2019, 10:29 am

    Good humbling article by Jonathan Clements. I now feel a mug for having VLS100. Missing a trick maybe. That said i’m at the beginning of my investing

  • 2 The Rhino October 1, 2019, 1:16 pm

    Well its been a formative decade for me, with a critical helping hand from MVHQ. I could not have predicted in any way, shape or form where I’ve ended up which I think is a good metaphor for market behaviour in general. Who knows what the next decade holds? Should be interesting whatever happens..

  • 3 Mr Optimistic October 1, 2019, 1:27 pm

    There has been a discussion about Vanguard LS in ‘ another place’. Thought I would post this article here as I have only just refound the link. It’s about their asset allocation Viz.
    Gist of it here ( thank you Mr telegraph)

    You have a bias to British stocks and bonds. Why?
    Currently, 25pc of our stock allocation is in Britain, and 35pc of our bonds are British although this was 100pc when we started as it was all we had access to. Our philosophy is that from a pure investment perspective it is best to have as small a “home bias” as possible. Typically we look at our competitors and aim to be lower. By doing this we hope the whole market will follow suit to reduce their bias.

    Will your home bias be coming down then?
    Probably in the not-too-distant future we will be dialling down that home bias, yes. Part of the reason we haven’t lately, even though there is a case for it, is that with Brexit going on we don’t want to be accused of making a tactical decision based on currency.

    Sorry for the thread drift and congratulations on 10 years. Do you sometimes wish…….

  • 4 Fremantle October 1, 2019, 2:28 pm

    Been following for about half that time, looking forward to the retrospective. You certainly gave me a short cut in my financial education, many thanks.

  • 5 oldie October 1, 2019, 5:54 pm

    It is good to see passive investment performance over a long period. Also your remarks on not assuming the future may be similar etc. Very important.

    Someone has to ask.
    Is there a meaningful comparison that can be made with active fund performance. Like for like – whatever that means. Average sector performance? Charges. Not sure how it could be done in a meaningful way?

    This not to cause debate between active and passive as many other issues influence this choice. But more to put some comparison into the information.


  • 6 Steve T October 1, 2019, 6:05 pm

    Interesting piece, thanks.

    Starting work in 2008, I have only really known the bull market. Perhaps being 100% in equities in my pensions reflects that.

    I like to think I have a sensible (and robust…ish!) rationale for my approach but will be interesting to see if that changes when the inevitable downturn arrives…

  • 7 Steve21020 October 1, 2019, 6:08 pm

    Like many others who do not work in the Finance business, the Financial crisis went unnoticed for a while, due to lots of things going on at that time. I had a Halifax Sharebuilder account with about 25 holdings in UK shares, all divs reinvested automatically. When I finally took notice, I read a few books about Asset Allocation and decided to ignore the Daily Mail and accept that there are important things going on beyond Dover. Fast forward to today and not only are UK equities at 20% of my portfolio, but they may go even lower. Especially after disasters like Woolworth, Lloyds and Carillion, to name a few, I sleep better at night with my ITs and ETFs working hard in the rest of the world, not only growing but throwing off the most humongous divis.


  • 8 Brod October 1, 2019, 6:20 pm

    This asset allocation thingy for risk management took a while but I’m finally seeing sense. I’m expecting a small DB and state pension to provide an index linked floor, but the nearer I get the more nervous.

    Just yesterday I sold 25% of my global all-equity Portfolio and will go 10/10/5% in Gold/Cash/Short Term Gilts with the proceeds. Mostly to wait for a buying opportunity but also I’m getting more cautious. I’m already quite under weight in US, and as I’ve not sold any US this rebalances me a trifle. Probably in the wrong direction at the wrong time but ho-hum.

  • 9 Brod October 1, 2019, 6:26 pm

    @Oldie – you could try SPIVA.

    The results I’ve seen are pretty unambiguous.

  • 10 Vanguardfan October 1, 2019, 11:17 pm

    @jim don’t beat yourself up. LS100 is a pretty great choice as a newbie – most of us started with much more suboptimal investments!

  • 11 ZXSpectrum48k October 2, 2019, 12:39 am

    Yes, the last decade was the perfect regime for passive buy-and-hold type investing. Distressed asset prices as a starting point in 2009, combined with a decade of financial repression from central banks. A raft of unconventional measures to supercharge risky asset prices and artifically suppress market volatility. Central banks had our backs.

    My wealth is now a multiple of what is was a decade ago and much of that is due to asset returns. Some is a function of measuring using a constantly devaluing EM currency (a.k.a. Sterling) but even in US dollars it still looks pretty good. It’s when I move away from using a fiat currency as a metric that the problem appears. In 2009, every £1mm of capital would have bought me more than £35k of (almost) risk-free income from 10-year Gilts. Now, it buys me less than £5k. Using “Gilt Income” as my metric, I’m poorer than in 2009.

    The last decade was to an extent just an exercise in PV’ing upfront income from the future to appear as capital gains now. Just games with discount factors. So I’m not too keen on where I’m left. Going forward, I need to accept taking more risk, at worse valuation levels, to generate less income. Or, if I take less risk, I will need to sell down those assets to live on or carry on working for longer.

  • 12 Vanguardfan October 2, 2019, 7:44 am

    @ZX interesting. For the ignorant among us, what is PVing…

  • 13 The Investor October 2, 2019, 8:51 am

    @Vanguardfan — I think @ZX means “present valuing” — that he’s referring to how in his opinion quantitative easing (I presume) and other factors have increased asset values (equities, bonds, property) at the ‘cost’ of lowering the returns we can expect in the future.

    I could be wrong though, @ZX speaks Advanced Finance and I’m still not entirely fluent! 😉

  • 14 Seeking Fire October 2, 2019, 9:30 am

    PV – Returns. Indeed. Or look at the lowering dividend yield / higher cape ratios on global index trackers as a proxy. Hence I think why Getting Minted keeps saying, I calculate buying x of income is x% cheaper than it was (which is quite a nice way of looking at it albeit I think its higher risk as concentrated on one market).

    Out of interest what is not to like about VS100 if you want global equity exposure. Tracker, low costs, home bias to the UK – which I currently like as UK has a low CAPE relative to other markets so looks relatively cheap – yup I know this is market timing which probably doesn’t work but still. Also probably some cognitive dissonance from the previous paragraph I guess.

    Nice article

  • 15 xxd09 October 2, 2019, 9:35 am

    Interesting essay over on Bogleheads forum by Jonathan Clements that states what ever you do your Savings are half your Portfolio
    It would follow that rather than shooting the lights out with pursuing Active management illusions that most of us cannot understand -a fire and forget Portfolio should be built and concentration returned to that which we can control-our human capital and the day job
    A passive portfolio is perfect for this -cheap,easy to understand and requires no constant tweaking -could be run with 2 funds only-a Global Equity and a Global Bond.
    Personally many years ago I bought the Market in Equities and Bonds and left things alone-adjusting Asset Allocation as I got older
    This of course gave one a preponderance of US investments because that is the way the market is-I benefited accordingly
    If the US goes down -we all will!
    I doubt if things will change much going forward
    Now retired but keep the same philosophy -human capital all gone but enough saved.
    Seems to be a working philosophy
    I found John Bogle in 1999

  • 16 Mr Optimistic October 2, 2019, 10:07 am

    PV = present value, the implied value of a future sum or income stream discounted back to today. You can have fun choosing the discount rate.

  • 17 Getting Minted October 2, 2019, 11:39 am

    @SeekingFire. I now calculate (at 1 October prices) that buying £1 of income is 32% cheaper in the UK than it is globally, and 39% cheaper in the UK than in the US. This is based on the dividend yield of selected income investment trusts. This could be a value opportunity or a value trap. I’m now reviewing my 58% exposure to the UK against some possible alternatives.

  • 18 The Rhino October 2, 2019, 12:05 pm

    I could be wrong though, @ZX speaks Advanced Finance and I’m still not entirely fluent!

    On the subject of fluency in advanced finance, I’m having a bit of a clearout having come to the conclusion I’m probably not going to become a highly-paid quant after all. I have a copy of Joshi’s ‘The Concepts and Practice of Mathematical Finance’ going spare, too nice to bin and too specialised for the charity shop 😉 – anyone want it?

  • 19 Brod October 2, 2019, 12:10 pm

    @Getting Minted – are you comparing “selected income investment trusts” in the UK with the whole of the market Globally and US? In which case, isn’t this comparing apples and pears? Or are you comparing just income investment trusts? If so, why income investment trusts and not the whole of the market, which would surely be more representative?

    And isn’t this just another way of comparing p/e values?

  • 20 Getting Minted October 2, 2019, 4:54 pm

    @Brod. I’m just comparing income investment trusts, all “apples”, because that fits with my income growth strategy. I’m literally seeking to buy income and growth in that income. I agree it’s similar to P/E values, or CAPE ratios.

  • 21 oldie October 2, 2019, 5:35 pm

    October 1, 2019, 6:26 pm
    @Oldie – you could try SPIVA.
    The results I’ve seen are pretty unambiguous.

    Thanks BROD, i need to look in detail but i think it gives useful info.
    Not been aware of SPIVA site.

  • 22 Tim October 4, 2019, 7:55 pm

    @oldie: You can also research this sort of thing by e.g going on Trustnet’s charting, and plotting FTSEAllShare vs. “IA UK All Companies” and setting the timescale as far back as it will go (1990 for that pair). That clearly shows the average of all the funds in the IA UK All Companies sector (which is what it’s showing you) underperforming the index (on a total return basis) 750% to 850% from 1990 to today. It doesn’t tell you how people who had the mythical ability to pick and follow the “good managers” would have done, but it does tell you that someone who spread their money around a bunch of random active funds would certainly have underperformed the index.

  • 23 ZXSpectrum48k October 5, 2019, 12:53 pm

    Yes, PV is present value. The “risk-free” government bond curve is widely used to discount the cashflows and capital of risky assets. A decade ago, the 30-year Gilt zero rate was 4.34%, so £1 in 30 years time was worth 29p today [=1/1+0.0434)^30]. The current 30-year Gilt zero rate is 1.01%. So £1 in 30 years time is now worth 74p, a change of 257%. All those income streams and capital values are worth so much more now in PV terms than a decade ago. The time value of money has radically changed.

    I’m not implying that’s it’s the only reason why assets have done so well in the last decade. The S&P500 had a terrible previous decade and didn’t make it back to it’s 2000 level until 2013. Nor am I implying that the activities of central banks are the sole cause. Nonetheless, I find it hard to believe that lower yields are significant driver of the uplift in the values of many risky assets. If you’d held a 15 year+ Gilt index tracker over the last decade, you’d have returned 236% compounded or 9%/annum. Not bad for a “safe asset” class. It beat both UK equities and EM equities.

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