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What caught my eye this week.
Back when passive investing first began to make serious inroads into the active investing orthodoxy – say 20 years ago – its adherents could be testy.
With none of the amiable grace of Vanguard founder Jack Bogle – whose own son runs an active fund – some passivistas would shout down, sneer at, or stonewall any signs of opposition to their creed.
I suppose it was defensiveness.
Now that even a Sunday newspaper will tell you to buy an S&P 500 tracker, it’s hard to recall when investing in index funds was a fringe pursuit. Something best left to people of low ambition and little intelligence, who’d rather a witless robot picked stocks and who’d prefer to run into the buzzsaw of the Dotcom crash than make a few ‘easy’ decisions to get superior returns.
Actually, when I put it that way then, yeah – the active investing diehards could be just as annoying, too!
I remember the balancing act required in moderating comments on this blog. As a person who loves investing in all its stripes – and who picks stocks as much for sport as the hope of a serious return – I never vibed with this ‘with us or against us’ attitude that some readers lent into.
Here’s the evidence, make your own mind up – that’s been my approach.
Passive is almost certainly the best and easiest way for you to achieve your returns. But you do you.
All in it together
Things have calmed down in the last few years. Surely because index investing is no longer an underdog.
Indeed at the end of 2023, passive funds in the US actually overtook active funds in terms of assets under management for the first time.
The rest of the world is close behind, and the direction of travel is clear.
A good few of us still enjoy investing in companies directly or tilting our mostly-indexed portfolios with side bets (and come join us on Moguls if that’s you).
But I honestly can’t remember the last time an arrogant commenter turned up on Monevator calling all index investors complacent idiots. It was years ago.
You do still sometimes see that attitude elsewhere – on hives of S&V like the ADVFN bulletin boards, say.
However I’d suggest the majority of smart retail investors now understand the strong argument for passive investing in index funds – however they run their own money.
The price is right
Even Eugene Fama seems to have taken a chill pill.
The Chicago economist – whose 1965 paper Random Walks in Stock Market Prices underpinned the intellectual case for the first index funds that arrived a few years later – told the Financial Times this week: “Efficient markets is a hypothesis. It’s not reality.”
The FT says:
Fama is surprisingly phlegmatic when it comes to defending his life’s work, echoing the famous British statistician George Box’s observation that all models are wrong, but some are useful. The efficient market hypothesis is just “a model”, Fama stresses. “It’s got to be wrong to some extent.”
“The question is whether it is efficient for your purpose. And for almost every investor I know, the answer to that is yes. They’re not going to be able to beat the market so they might as well behave as if the prices are right,” he argues.
Fama also makes a good point when he admits to some regrets about choosing the word ‘efficient’ to describe markets.
‘Efficient’ sticks in the craw of those who’ve through bubbles and crashes and who struggles afterwards to see an intelligently discounting market at work.
Easy now! You don’t need to revive the old fighting spirit to shout at me. I understand boom and bust is not incompatible with efficient markets. I’m just saying many people do struggle with the concept.
Anyway Fama has the best rejoinder…
“If prices are obviously wrong then you should be rich,” he says.
Have a great weekend.
Deciding you should invest outside of the UK but then electing to put all your money in China is a case of out of the frying pan and into the wok.
It doesn’t spread your risk, and it exposes you to the biggest fear that most of us have when we make an investment, which is the potential for an all-out loss.
Studies have shown that as a species we prefer two birds in the hand to a potential five in the bush – if they come at the risk of a dead parrot.
In other words, we’re more averse to loss than we’re greedy for gains.
And that’s important in the context of overseas investing, because some countries have done far better or (more scarily) far worse over the long-term.
Long-term returns from different countries’ stock markets
| Annualised real return: GBP (UK pounds) | Growth of £1 since 1900 | |
| Australia | 6.4% | 2,134 |
| Belgium | 3% | 38 |
| Canada | 5.2% | 520 |
| Denmark | 6.8% | 3,388 |
| Finland | 4.9% | 375 |
| France | -0.1% | 0.87 |
| Germany | 3.5% | 74 |
| Italy | 1.7% | 8 |
| Japan | 3.6% | 80 |
| Netherlands | 5.5% | 742 |
| Norway | 3.9% | 118 |
| Portugal | -0.2% | 0.81 |
| Spain | 3.8% | 101 |
| Sweden | 5.8% | 1,069 |
| Switzerland | 5.7% | 968 |
| U.K. | 4.8% | 341 |
| U.S.A. | 6.9% | 3,703 |
| World | 6% | 1,344 |
Data from JST Macrohistory1, The Big Bang2, MSCI, Russell/Nomura Japan Index, Aswath Damodaran and FTSE Russell. August 2024.
Small differences in returns matter
This cumulative real return data for each country was a real eye-opener for me the first time I saw it.
It’s a reminder that seemingly small differences have a major impact when it comes to compound interest.
In terms of annual return, the difference between investing in shares in the U.K. versus the U.S. doesn’t look like that much:
- Averaged over the past 124 years, the annualised real return from equities3 for a British investor is 4.8%.
- Over the same period, U.S. investors enjoyed a slightly higher annualised return of 6.9%.
What’s 2.1% between two countries divided by a common language, you say?
Well, over the long-term such small differences really do add up:
- A U.K. investor who reinvested all her dividends since 1900 would have multiplied her portfolio 341 times over.
- A similar US portfolio would have multiplied 3,703 times!
And these are two countries where returns have historically been in the same ballpark.
World stock markets’ cautionary tales
In contrast to those happy Brits and Yanks, an extremely proud French investor who put all their money in France’s lower-returning equities would actually have lost money.
The magic of compound interest turned out to be a cheap party trick in their case. Instead of our French Rip Van Winkle (and a bit) waking up to a snowball of money, they would discover their original stake had shrank 13% (even with dividends reinvested!)
And it’s not as if France is Russia. There was no Communist Revolution to explain away the failure of ‘stocks for the long run’ here.
It wasn’t even due to the devastation inflicted by two World Wars.
Rather, a post-war bear market fed by industrial nationalisation, high inflation, and currency depreciation did the real damage.
The recovery began in 1983 and since then France has enjoyed excellent stock market returns. So there’s no reason to believe the French market is intrinsically radioactive.
The key lesson is that when old hands warn that investing is risky, they mean it.
Sometimes, in some places, those risks can overwhelm every comforting shibboleth we investors like to cling to: mean reversion, compound interest, and investing for the long-term. All of it.
Countrycide
No one lives to 124 (yet) and none of our most elderly were wizened old investors. So some people might say that looking at returns over such a very long period is misleading.
I disagree – provided you’re not using the data for more than what’s reasonable.
As a way of seeing how different countries have produced very different long-term returns, it’s perfectly useful.
But the data shouldn’t be used as a basis for cherry-picking one country over another when deciding how to allocate your money for the future.
Rather, it reinforces the case for diversifying very widely using global tracker funds – because every tale of success and woe is different.
Not one world stock market (yet)
Why has Denmark pulled away from Sweden and Norway?
For that matter, why are its returns only a hair’s breadth behind superpower USA – winner of the 20th Century?
It’s not like Denmark qualified as an Anglophone, New World, emerging market in 1900.
Yet those are the explanations used to explain the success of the US and Australia – even though Canada’s performance is only fair to middling.
What’s more, Denmark’s stock market has been on fire the past 20 years whereas the UK’s has been moribund. Consequently Britain has slipped into the bottom half of the table, after decades as one of the leading lights.
And while it’s true that losing a World War is bad news, Japan and Germany got to much the same result by quite different routes.
For example, German society was devastated twice in the 20th Century, while Japan’s spectacular stock market recovery was famously derailed by a contemporary bursting asset bubble and three decades of secular stagnation.
Correlation is not destination
Some would argue that world stock markets are now too closely correlated for this historic data to be of much interest.
I say: not so fast!
We are still seeing some highly divergent outcomes. Take Denmark versus the UK over the past decade:
- Denmark = 13.9% real annualised return (GBP)
- UK = 2.3% real annualised return
Those are two highly correlated markets but, even though they normally head in the same direction, correlation tells us nothing about the amplitude of their individual performances.
Correlation is useful in helping us to identify complementary asset classes, but it doesn’t tell us that all equities are interchangeable.
Lessons from history
In Fooled by Randomness, author and Black Swan-spotter Nassim Taleb points out that an investor in Russian or Chinese companies at the start of the 20th Century who suffered a complete wipeout would tell a rather different tale about ‘investing for the long term’ than the Americans who write all the investing books.
Who is to say that the 21st Century won’t hold similar surprises?
It’s easy to believe the fate of Imperial Russia or China has little application for modern citizens of the rich world.
But just look at France again. That was a society as advanced as any on the planet, yet deliberate government policy choices ruined its stock market. The same could happen anywhere, even in the US.
Spreading your money across world stock markets remains a good idea to reduce the risk of being 100% in an all-out lemon for 40 years, as well as for the more general diversification benefits.
Note: This article on world stock markets has been updated. Comments may refer to previous data, but in most cases they are still relevant and interesting. Especially mine.
- Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
- Dmitry Kuvshinov and Kaspar Zimmermann. 2021. The
Big Bang: Stock Market Capitalization in the Long Run. Journal of Financial Economics,
Forthcoming. [↩] - The real return is the return after inflation has been taken into account. [↩]
What caught my eye this week.
Long-time readers may recall that my investing life is ruled by an enormous multi-sheeted monster of a Google Spreadsheet.
This spreadsheet doesn’t just track my actively-managed portfolio and its returns.
It also keeps tabs on everything from my private investments to the cashflows that enable me to unitise my returns and so keep score versus the professionals.
My spreadsheet also surfaces interesting data and charts, such as where I’m geographically exposed and what proportion of my wealth is tax-sheltered and how.
There’s even an implied sustainable withdrawal rate sheet with various scenarios.
Needless to say, this spreadsheet also tells me my up-to-the-second net worth. (For good or ill).
Naturally this value includes the asset that is my house, as well as the liability of my mortgage.
But because I have various windows onto my financial status, I can see figures with or without the house/mortgage. (And the same for my pension).
Such distinctions help because, for instance, your personal home is an extremely important asset that should be factored in when you consider your net worth and financial posture – but for most of us it can crowd out insights into how your ‘true investing’ portfolio is structured.
For example, if you have 5% in a REIT and 45% of your net worth in your home, then you have 50% property exposure. Sometimes it’s useful to think that way. More often not so much.
I even have a ‘liquid/illiquid’ view that groups my pension (for now) and my private investments together as being functionally inaccessible.
This is handy to see what I could get at as cash if I had to cut and run. (The hopefully very unlikely Plan B aka bugout scenario…)
I did it my way
Some masochistic readers have asked me to share this sheet – or at least the template – as we do our mortgage repayment-or-invest calculator.
But I’m not sure that’s the best idea. Mostly because I created this sheet to fit my personality and goals over the years.
I’m weird, and yours will be different.
Case in point: when I open it up, the first two sheets of my spreadsheet are watchlists – a fairly futile attempt to stop me focussing on the noisy movements of what I do own, and instead pay attention to the potential of what I don’t own.
At times I’ve even buried all my return data in a separate sheet at the end of a long line others, though that’s not my current set-up.
Again: an attempt to force better behaviour through structure.
Creating and evolving your own spreadsheet like this will teach you things about how you invest, too. And that’s valuable in itself.
They did it their way
Perhaps I will post more about my sheet someday.
But in the meantime check out Nick Maguilli’s article this week on how to track your net worth at Of Dollars and Data.
Nick’s shared his own net worth-tracking spreadsheet, too.
Its vastly simpler than mine, and probably better-suited to the majority of our sensible passive investing readers. You can always use it as a starting point if you want to build something more complicated.
One snag is last time I looked live UK fund data is a lot harder to come by with the Google query functions Nick employs for his ETF-based portfolio.
I have less than 1% in non-listed funds at present and I just update the values manually when I think it matters. But from memory you can scrape fund price data from Yahoo Finance with alternative calls to bring live values into Google.
A few years ago Fire V London shared a spreadsheet that pulled fund data from Hargreaves Lansdown, so that’s worth checking out too.
A Google search reveals this is a common roadblock. If anyone has the current and definitive solution, please do share it in the comments below.
Finally, if you’re just looking for an off-the-shelf tracker, then here’s how The Accumulator does it with Morningstar. Note that TA prefers money-weighted returns to unitisation.
What better project for the long weekend than overhauling your portfolio tracking? (I’m not entirely joking, given the weather…)
Enjoy!