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Why a total world equity index tracker is the only index fund you need

Photo of Lars Kroijer hedge fund manager turned passive index investing author

Making the case for world equity index trackers is former hedge fund manager turned author Lars Kroijer, an occasional contributor to Monevator. His book, Investing Demystified, is focused on index fund investing.

I believe the only equity exposure you should buy is the broadest, cheapest, and most tax efficient – which is a total world equity index tracker.

Most Monevator readers are probably already willing to accept the following points, which in my view will massively improve your returns over time:

1. You accept that like most investors you don’t have an ability to outperform the financial markets (a so-called ‘edge’) and as a result you agree that you should invest in index tracking products. In other words you’re what I call a ‘rational investor’.

2. You agree that keeping trading to a minimum and investing tax efficiently with the lowest fees will boost your returns in the long run.

3. You accept that to have a hope of decent long-term returns you should have some equity exposure, as the dull returns that safer bonds or cash in the bank provide (which may not currently even beat inflation) mean those assets are very unlikely to do the job alone.

So having agreed to all that, the question is which equities should you own?

Investing without edge

From the perspective of the rational investor – an investor accepting and embracing the fact they don’t have an edge in the market – each dollar, pound, or euro invested in the various stock markets around the world is presumed to be equally smart.

If the markets say a share in Apple is worth $125 and a share in Microsoft is worth $40, then we as rational investors don’t have a preference for owning one of those shares over the other, at those prices.

If we did have a preference, then we would effectively be saying that we know more about the future movements in share prices than the aggregate market does.

As rational investors, we don’t believe that’s true.

We believe that the money/person buying Apple is no more or less clever or informed than the money that’s invested in Microsoft.

And so we follow the money.

The case for market capitalisation weighting

Extrapolating this logic to the whole market means we should own shares in all the market’s stocks, weighted according to their fraction of the overall value of the market.

Let’s assume for a moment that ‘the market’ refers only to the US stock market, and that right now Apple shares represent 3.5% of the total US market value.

This implies that 3.5% of our US equity holdings should be in Apple shares.

If we do anything other than this, then we are effectively saying that we are cleverer or more informed than we really are – that we have an edge over the other investors in the market.

But we don’t believe that’s true.

So 3.5% in Apple it is.

Follow the global money trail

Buying hundreds of shares in a stock market in proportion to their overall market capitalizations is much simpler today than it was even a generation ago.

It is pretty much what most index tracking products offer, assuming they are so-called market capitalisation trackers. (There are other sorts of trackers, which I believe we should reject as rational investors. I’ll explain more in a future article).

In our example above, Apple would constitute 3.5% of the value of a US index tracker.

But why stop at the US market?

There is no reason to think that the UK market is any less informed or efficient than the US one, for instance.

So if there is $15 trillion dollars invested in the US stock market and $2 trillion invested in the UK market, that’s what our portfolio should mirror if we’re to track each dollar, pound, or euro of global capital.

Likewise with any other market in the world investors can get access to.

We should invest in them all, in proportion to their share of the world equity markets, as best we can in practical terms.

No home advantage

Some of you may be nervously twitching at this point. You know you’ve got a lot more money in the UK stock market than in other markets around the world.

This is illogical for rational investors, although it is not unusual.

Many investors around the world overweight their ‘home’ equities.

For instance, the UK represents less than 3% of the world equity markets, but the proportion of UK equities in a typical UK investor’s portfolio is often 40% or more.

Why does this happen?

Investors feel they know and understand their home market. And perhaps active investors think they would be better able to spot opportunities before the wider market at home. (A fanciful notion for us rational investors!)

In fairness, the concentration in home equities can also be because of investment restrictions or perhaps because investors wrongly are matching their investment with liabilities connected to the local market.

Another factor that’s cited is currency risk.

While I think there is some merit in currency matching specific and perhaps shorter-term liabilities via your investment portfolio, I think such matching is better done through the purchase of government bonds in your home currency.

If you worry that major currencies fluctuate too much for you, then I would ask if you’re taking too much equity market risk in the first place?

Broader investment and currency exposure is in my view favourable not only from an additional diversifying perspective, but also as a protection against bad things happening in your home country.

Typically whenever a currency has been an outlier against a broad basket of currencies, it has been a poorly performing one because of problems in that country (though there are exceptions to this rule of thumb).

And it is exactly in those cases that the protection of diversified geographic exposure is of greatest benefit to you.1

Whatever the reason, various studies have suggested that this supposed home field investment portfolio advantage is not real, but many of us still continue to allow our portfolios to be dominated by our home market.

If you are overweight or underweight one country compared to its fraction of the world equity markets, then you are effectively saying that a dollar invested in the underweight country is less clever/informed than a dollar invested in the country that you allocate more to.

You would therefore be claiming to see an advantage from allocating differently from how the multi-trillion dollar international financial markets have allocated.

But you are not in a position to do that unless you have edge.

And we agreed we don’t have edge…

Since the millions of investors who make up the global markets have already moved capital between various international markets efficiently, the international equity portfolio is the best one for anyone without edge.

That’s on top of the other advantages of added diversification, simplicity, and cost.

Do you know better than all the world’s other investors?

Take me as an example. As a Danish citizen who has lived in the US and UK for more than 20 years, I might instinctively over-allocate to the US and Europe because I am more familiar with those markets than, say, Thailand or Japan.

But in doing that I would implicitly be claiming that Europe and the US would have a better risk/return profile than the rest of the world.

It might or might not turn out that way, but the point is that we rational investors don’t know ahead of time.

Similarly, you’ll often hear investors say things like: “I believe Brazil, Russia, India, and China are set to dominate growth over the next decades and are cheap”.

Perhaps you’d be right to say so, but you would also be saying that you know something the rest of the world has not yet discovered.

This is not possible unless you have edge.

Rational investors who accept they don’t have edge should therefore simply buy the global equity market.

The advantage of diversification

The world equity portfolio is the most diversified equity portfolio we can find.

And the benefits of diversification are great.

Consider the following chart showing how diversification impacts risk in a home market, such as the UK stock market:


As you can see from the chart, the additional risk reducing benefit of diversification tails off as we add ever more securities to a home market portfolio.

This makes sense. Shares trading in the same market will tend to correlate, since they are exposed to the same economy, legal system, and so on.

This means that after picking a relatively small number, you have diversified away a great deal of the market risk of holding any individual company.

But by further expanding our portfolio beyond the home market we can achieve much greater diversification in our investments.

This is not just because we spread our investments over a larger number of stocks, but more importantly because those stocks are based in different geographies and economies.2

So we could have similar chart to the one above, but one where “securities” was replaced with “countries” in the x-axis.

Only a few decades ago, we did not have the opportunity to invest easily across the world like this.

But with the range of index funds and ETFs now available, investing in a geographically diversified way is a lot easier than it used to be.

One fund to do it all

In fact today you can invest across the global equity market by putting your all your equity money into a single world equity tracking fund or ETF.

To summarize the benefits:

  • Your portfolio will be as diversified as possible and each dollar invested in the market is presumed equally clever; consistent with what a rational investor believes. (I bet a lot of Japanese investors wished they had diversified geographically after their domestic market declined as much as 75% from its peak during the past 20 years.)
  • Since we are simply buying ‘the market’ as broadly as we can, it’s a very simple portfolio to construct and thus very cheap to run – and of course we don’t have to pay anyone to be smart about beating the market. Over time this cost benefit can make a huge difference. Don’t ignore it!
  • This kind of broad based portfolio is now available to most investors, whereas only a couple of decades ago it was not. (Most people then thought ‘the market’ meant only their domestic market.)

Even if you are already an index tracking investor, for some of you getting an internationally diversified portfolio may have involved combining multiple products in a bit of an ad hoc way to gain international exposure (perhaps based on gut feel of which markets will outperform).

Don’t bother. The market has already done all the work of allocating between countries and regions for you.

Instead, focus only on how much you want in equities overall compared to less risky asset classes and on collecting the equity premium.

The bottom line is you should buy the broadest based index tracking products you can.

By definition, that’s a total world equity market tracker.

Lars Kroijer’s book Investing Demystified is available from Amazon. He is donating all his profits from his book to medical research. He also wrote Confessions of a Hedge Fund Manager.

  1. Currency hedged investment products do exist, but in my view their on-going hedging expense adds significant costs without clear benefits, and on occasion further fails to provide an accurate hedge. Besides, many companies have hedging programs themselves meaning that a market may already be partially protected against currency moves, or have natural hedges via ownership of assets or operations that trade in foreign currency (like Petrobras owning oil trading in USD). []
  2. I believe this is still true, despite international correlations having gone up as the world has become more inter-related and large companies increasingly global. []

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{ 121 comments… add one }
  • 51 The Investor March 12, 2015, 10:31 am

    This article basically seems to be a rehashing of the efficient market hypothesis (EMH). It doesn’t take long investing to realise that the market is not efficient. [There are biases.] You can exploit them if you can keep on top of your emotions and biases, and have the time to pay attention. However, if you don’t want to do that, the advice here is good advice.

    @Matt — Hmm, that must be why so many investors have a track record of beating the market… Er, hang on

    Don’t get me wrong, I invest actively for various reasons and I think there’s some truth in what you say, but exploiting it is another matter and it’s definitely not down to “having time to pay attention”, in my view.

    In short: let’s not write off a sensible approach that will beat 90% of professionally managed funds (and I may be being generous to the other 10%) over 5-10 year periods or more as a “rehashing”, or suggest that beating the market is anything other than very difficult. 🙂

    @All — On a related note, I hope everyone who is saying “the US is expensive” realizes they are expressing the view that they have edge and thus know better than global money (or have other motivations).

    i.e. I hope everyone *gets* the point of the article, and that thus people realise that their view contradicts it (unless they have edge).

    Now as one of those delusion people who believes he has edge, I have some sympathy with the view the US market is looking expensive, but please realize people have been saying that’s “obviously expensive” according to CAPE on comments on this blog and elsewhere since at least 2012. E.g. Here’s the excellent Meb Faber saying it looks a “tad expensive” in October 2012.

    Please note that I am not attributing the “obvious” quote above to Meb and his excellent research. I mean private investors, blog commentators, etc. The S&P 500 is up at least 40% since “the US is market is obviously expensive” became pretty much consensus among DIY asset allocators, I’d estimate.

    As I said to Matt above, more power to you if you think you can call these things — I hope you have carefully documented evidence of outperformance to prove it to yourself, for the sake of your wealth. 🙂

    I am mainly addressing my words of caution to those casual readers who thought “hey, that article sounds sensible, I get it” and are then confused by all the DIY George Soros and Warren Buffetts in the comments (again, I am one 🙂 ) who might seem to being stating some obvious truth that they’ve missed… or to have completely missed the point. 🙂

    @DaveS — That point about Home Bias inflating larger-by-population markets is *really* interesting IMHO. Have never heard it made before, and I think well worth some pondering. I presume academics have looked into it. Will try to get some time to dig something up.

  • 52 The Rhino March 12, 2015, 10:59 am

    I’m not sure saying something along the lines of ‘high PE or CAPE or somesuch similar metric prob means reduced future returns’ is anything to do with edge.

    It seems a fairly reasonable thing for anyone to say based on statistical evidence, charts and such like you see in respectable literature.

    Its not some prediction of future prices that has required novel new information or is a clever interpretation of the information currently available.

    Say you were Lars, and Aunt Agatha suddenly bequeathes you £1M tomorrow afternoon. Would you slap it all in a world tracker? Or would you secretly have a good old worry about whether the world looks expensive based on historical measures?

    I don’t know the answer, but I know those returns vs CAPE charts seem pertinent, especially when it comes to lump sums.

  • 53 Matt March 12, 2015, 11:41 am

    @TheInvestor: Fund managers have a whole heap of problems which lead to their persistent underperformance. They are hostage to short term results, otherwise they get in trouble from their investors. Not to mention the fees they charge. They are a large part of the inefficient market, and you can exploit their short term bias.

    And I’m not writing off your approach, I think it is a good one. What I’m disagreeing with is your argument for the approach. In the same article you are saying that the market is efficient, but that it has a home country bias. All the people who you are addressing this to are part of the market. We all have our own biases, and when enough people have the same bias, it flows through to the market. The dot-com boom/bust is a great example of this. That alone should be enough to dissuade anyone from believing that the market is efficient, unless they have a huge capacity for cognitive dissonance.

    Finally, I did not say “having the time to pay attention” is what it comes down to, that was one of the last things in my list of what is needed. Far, far more important is recognising and controlling your emotions and biases. And that is hard. That is why you have correctly said that beating the market is hard in your comment, as opposed to your article which suggests it is pure luck. Everyone thinks it’s about being some sort of genius, and it’s not.

  • 54 Richard March 12, 2015, 12:22 pm

    Another excellent article. Thank you.

    Is it irrational to say, for example, that the FTSE250 has generally beaten the FTSE100 over time (admittedly the past is no guide to the future, etc) and so overweight the FTSE250 w.r.t. FTSE100 in my portfolio?

  • 55 The Investor March 12, 2015, 1:56 pm

    @TheRhino — You wrote:

    “I’m not sure saying something along the lines of ‘high PE or CAPE or somesuch similar metric prob means reduced future returns’ is anything to do with edge. ”

    I’m afraid this is what I mean when I say I fear people aren’t getting the argument. (An argument you’re at liberty to disagree with of course 🙂 ).

    As Lars explained in detail above, the world’s money has made its mind up about where the best returns are.

    Everyone and their dog knows about the CAPE ratios, knows that cheap markets are better than expensive ones and so on and so on. I’d bet more money than every blog commentator in the world added together sits in an averagely large macro hedge fund that is making these decisions everyday, based on likely millions of variables, not the odd CAPE graph they see on the Internet.

    But that weight of money has been placed as it has.

    For one to say “I will put less in the US because *reasons*” is to express a claim to edge, because you’re saying the weight of global money is wrong.

    As I say, we can all do what we like, but understand that is the argument here.

    Note one might have other reasons/biases not to just use a single global tracker even if you fully buy Lars’ argument, perhaps to do with your view on risk reward, or on currency risk or you find having several different trackers fund to be good fun, or wotnot.

    But “better risk-adjusted returns will come through a different allocation” is an expression of a claim to edge.

    For the record, I don’t think I’d use a single global tracker myself, even if I was a predominately passive investor.

    This article isn’t my view, it’s the view of Lars Kroijer.

    I do all sorts of crazed things with my portfolio today, and if I went back towards a more passive approach some of that would linger.

    i.e. I would still claim some edge, I think.

    Similarly, incidentally, acting on the back of the interesting points made about Home Bias earlier in the thread (and referred to here again by Matt) is still an expression of a claim to edge, I think.

    You’d be saying “I think I know better than the market that home bias is distorting returns”. You may or may not be right. Home bias is not a secret, so presumably a rational market has already bet against it’s impact to some extent.

    Note that Lars doesn’t say edge doesn’t exist, he says it’s incredibly rare. It’s a matter of record that he has relationships with some hedge funds etc, but equally that aside from this he invests his money passively, as described in his book.

    He was a full time hedge fund manager for many years, but he thinks this approach is generally best not just for Joe Blog Reader like us but for a financial insider like himself.

    By all means allocate as you see fit, and have your opinions about whether a market is expensive or not. We can stock pick if we want to! 🙂

    But understand what you’re up against, that’s my message.

    @Matt — I mentioned your biases comment in my summary of your post, but you’re right I didn’t focus on it. Never enough time etc.

    So just to note that I take on board you’re saying (and said!) this is a good approach as far as it goes and so on. My comments are about the other parts of your comment. 🙂

    Just to be clear, this global tracker approach isn’t my approach, the article is by author Lars Kroijer. We agree his approach makes a lot of sense though.

    As I already mentioned, I have a lot of sympathy with the points about inefficiencies you made. I also agree that fund managers are hampered by career risk and so forth, and also know that the impact of high fees that erodes away any outperformance some few do manage to deliver.

    But to quote myself: “I think there’s some truth in what you say, but exploiting it is another matter”.

    My back goes up (as a comment moderator / website owner / someone who believes passive investing is best for most) when I read comments with the general tone of the first part of your first comment, because the Internet is strewn with people claiming that sort of thing and the fund industry promotional material similarly, and yet the evidence is *overwhelming* that most fail to beat the market, whether professional or amateur.

    And that’s been my observation in reality, too. Anecdotally, the more strident the voicer of such opinions, the worse calls they seem to make. (I have no idea as to your record and I don’t mean you, this is a general thing I’ve noticed).

    The stuff you cite is not novel, although it’s come more to the fore in the past 5-10 years I concede. But anyway it’s well known. And alpha has shrunk further in the meantime.

    The market may not be efficient, we agree, but exploiting its inefficiencies is hard.

    Hence the proper approach in my view (and I am talking my own book) is to be incredibly humble about attempts to beat the market, to proceed with due caution, and to try to make sure you’re attempting it not because you think it’s anything like straightforward, but perhaps because you’re compelled to (or because you’re paid to — it’s totally rational for well paid fund managers to try to beat the market!)

    The longer I invest, learn about investing, and write about investing, the more convinced I am that most people are bad investors, and many of the good ones will also lose to the market unless they’re lucky.

  • 56 The Investor March 12, 2015, 2:03 pm

    Is it irrational to say, for example, that the FTSE250 has generally beaten the FTSE100 over time (admittedly the past is no guide to the future, etc) and so overweight the FTSE250 w.r.t. FTSE100 in my portfolio?

    Well, the classic economics theory would have it that the reason the FTSE 250 has outperformed is because the companies are smaller. Hence they are riskier (/more volatile). Hence if you overweighted the FTSE 250 you would have been rewarded for exploiting the so-called size premium, at the expense of taking on more risk (/volatility).

    If you think that the size premium is likely to continue to persist than I wouldn’t say it’s irrational, no, if you were committed to a very long-term view. But who knows how things will turn out?

    From the point of view of Lars’ article, it’s possibly a claim to edge though. The size premium is known. I am not sure how Lars’ definition of edge treats risk/reward premiums, I can’t really speak for him. 🙂

  • 57 The Rhino March 12, 2015, 2:10 pm

    @TI yeah I see what you mean – I just need Aunt Agatha to do the bequeathing bit now..

  • 58 The Investor March 12, 2015, 2:18 pm

    @TheRhino — “I just need Aunt Agatha to do the bequeathing bit now..”

    Hah! 🙂 How we could all do with an Aunt Agatha (though from memory in the books they seemed to stick around… 😉 )

  • 59 Paul S March 12, 2015, 4:21 pm

    The US CAPE , based on annual averages, has been above its long-term average for 25 consecutive years. During that time it has averaged 25…..its current level.

    Not the most useful metric!

  • 60 Tim G March 12, 2015, 5:40 pm

    Your discussion of currency risk is quite general, but you don’t address the more specific issue of whether holding >50% of all your equity in the US, even if it is ‘right’ in terms of global market weighting, could increase this currency risk to unacceptable levels. I would be interested to see some exploration of actual scenarios, in a similar way to considerations of how different equity:bond allocations would have performed if they had been held during the ups and downs of the past. My guess is that currency risk is overstated (and that we tend to ignore the potential for lost returns as a result of UK home bias!) but it would be good to have this intuition either confirmed or overturned by some hard data.

  • 61 The Accumulator March 12, 2015, 7:25 pm

    here’s a review of the main fund of fund products out there: http://monevator.com/passive-fund-of-funds-the-rivals/

    Thing about measures like CAPE is that the predictive value is about 40%. So while an expensive market is quite likely to deliver below average returns at some point in the future, there is every chance that it will confound your expectations.

    So what you gonna do? The answer is, as neither you nor anyone else has any real clue what will happen, so you must suck it up.

    A high CAPE reading doesn’t tell you to lower your US allocation by 10% or whatever. It tells you that there’s a reasonable chance returns may be lower than you’d expect in the future. So you may well need to invest more now, or invest for longer to achieve your objectives as future returns are liable to be less than the long-term average.

    If they’re not less, well, that’s a bonus.

    Nobody believes the market is efficient. Anybody can see they are not. But they are mostly efficient. And you have to seriously question whether you’ve got any reason to suppose that your best guess about what will happen is better than the weight of the market’s opinion.

    You’re more likely to fall victim to your own biases than exploit anyone else’s consistently.

    I don’t buy this theory about populous countries overheating their own markets through home bias. The US has been one of the best performing markets over the last 100 years. If it was systematically overvalued by dumb money then smart money would bet against it and it would mean revert. And there are so many other factors to take into account. How would you isolate this one possible tendency and take action?

    Your best ballast against the risk inherent in equities is a strong slug of bonds. Domestic, government bonds.

  • 62 dearieme March 13, 2015, 12:21 am

    Suppose I take the point in the Vanguard report (thank you, Mumble) that I can hope for a decent return with lowest available equity volatility by having 80% of my equities in the UK: I’d do that with a tracker.

    I’m tempted to go for my 20% overseas equities as individual shares held in SIPPs, because that should (have I got this right?) avoid withholding tax. Such tax avoidance is presumably an “edge” that is perfectly genuine.

    I suppose I might reflect that my equities are heavily UK, as is all my cash, and a bunch of Index-Linked Savings Certificates. You can see where this is going: should my fixed interest then actually be in a tracker of foreign bonds?

  • 63 Matt March 13, 2015, 2:32 am

    @The Investor: I’m happy to describe my performance to date, though I’m not sure it will be that illustrative.

    Mostly I haven’t been investing long enough to draw any reliable conclusions. The first stock I bought was in Sep 2012 (and that was a conservative, diversified LIC), but overall my funds have had an average time in the market of about 10 months (due to most of the money only being invested more recently). In that time, my performance has been very slightly market beating after costs, though you could call it market matching and I wouldn’t argue.

    In that time, I have had some stocks bottom at 40% down (didn’t sell), and some almost double. As of now, my worst position is down 14% (bought 6 months ago), and my best is up 79% (about 40% CAGR), though I have another up 48% over the 6 months I have had it. As I said, not enough time to tell.

    Everyone is a brilliant investor in a bull market though. Once I have been through a crash/recovery cycle, I’ll have a better idea of how I’m doing. If I’m not beating the market at that point, I’ll probably switch to index funds and save myself a lot of time (a small part of my portfolio is already index funds).

    I don’t mean to sound like I have all the answers. Initially I thought I had stumbled into an EMH circlejerk which I now see that I haven’t.

  • 64 The Investor March 13, 2015, 10:20 am

    @Matt — Cheers for sharing. Early days as you say, but of course nicer to see a promising start then a bad one!

    Mind you they do say with some justification I believe that a hefty loss early on helps a stock picking career over the long-term. (Buffett being the outlier as ever, he seems to have got by with a lesson about opportunity cost… 😉 )

    I had two near-wipeouts in my first couple of years back in the day, both times due to seemingly unpredictable issues (fraud at one, targeted by activists that ultimately forced a firesale at the other) that with hindsight I still might have avoided. A good spanking loss makes one humble about the limits of one’s knowledge/strategy going forward. 🙂

    Anyway, good luck with your investing!

  • 65 Grumpy Old Paul March 13, 2015, 12:29 pm

    Whilst I can accept the notion that an individual national market is somewhat efficient, I find much harder to believe that allocation of funds between rather than within markets is efficient,

    One of the reasons already mentioned above is home bias and another is the desire by investors rightly or wrongly to avoid currency risk.

    A major reservation that I have about the notion of efficient markets is that although markets may embody information in the public domain, they must also reflect the behavioural traits of investors too. Markets must also reflect the investment decisions by institutions such as pension funds which a) often have a very poor track record and b) in the case of funds supporting final salary pension schemes have criteria biased towards meeting long-term liabilities rather than purely targeting return.

  • 66 Lars Kroijer March 13, 2015, 12:44 pm

    a couple of comments:
    1: US is easily the biggest market obviously so the biggest exposure and a worry to some. Couple of points on that. Assuming efficient markets, if there were benefits from diversifying away from the US (or not) that would already be reflected in the capital flows by bidding up the equities of other countries. My sound like archaic point, but in the absence of better knowledge (or having an edge) I think it is plenty good for most investors and better than actively trying to outperform by actively reallocating. Not having looked at this for a while but think the US is around 35% (but keep in mind that Apple and other of the largest companies there are very international so in my view overstates the actual exposure even if that is true elsewhere too). This ratio has been declining in the past decades less b/c performance and more because of IPOs elsewhere (like Alibaba and huge former state owned companies being listed). When I first looked at this stuff in the early 90s it was more like 45% from memory. This lower ratio adds to geographic diversification. I don’t really subscribe to the “US is toppy” argument b/c I think it implied edge (go short US and long MSCI world ex-US, gear it up 3x and you are a macro hedge fund. All that is missing is the fees :)). There is a bunch of stuff on all this in chaper 5 of my book (breaking the rule to not pitch my own work here).
    2: An interesting point was made on risk premium and expected return. We say expect 4-5% above inflation from equities. But obviously it seems wrong that people investing in a low risk environment should be compensated the same as someone entering the fray in March 2009. The 4-5% is really an average expected return for average expected risk. There isn’t a ton of academic work here, but the few studies here suggest that the risk premium does indeed change over time in line with the risk of the market. So a good indicator is the implied volatility of the equity market. If you have access to long term option info (so 1-2 years) that is a great place to start, but even the VIX gives some info. The lower the volatility, the lower future returns you should expect. Again there isn’t great amounts of work done on this, but it also kind of makes sense that even within equity market index trackers the whole risk/return maxim holds.

    Hope this answers questions. To give an idea, I was giving a talk earlier in the week where I had to explain the difference between bonds and equities to a group of tech entrepreneurs so by comparison this group is doing really well whatever the choices made.

    Have a great weekend!

  • 67 DaveS March 13, 2015, 1:48 pm

    I have seen in a few places that number of around 30% for the US share of global market capitalisation. It does bother me a bit, then, that global trackers always seem to allocate about 50% to the US.
    Does it imply that the so-called global trackers only cover 60-70% of the actual global market? Although I suppose it would affect equally all markets that they do cover.

  • 68 Topman March 13, 2015, 5:20 pm


    In respect of Vanguard VWRL, Morningstar says:

    “This Fund seeks to provide long-term capital growth of capital by tracking the performance of the FTSE All-World Index, a market-capitalisation weighted index of common stocks of large and mid cap companies in developed and emerging countries.”

    Morningstar categorises VWRL as “Global Large-Cap Blend Equity” and shows its benchmark as being “MSCI World NR USD” and shows the United States at 50.47% in its “World Regions” table.

    On what basis is the 30% that you cite arrived at?

  • 69 Topman March 13, 2015, 5:25 pm

    Correction: “….. long-term growth of capital …..”

  • 70 DaveS March 13, 2015, 5:55 pm

    @Topman – many different figures are reported, but usually in the 30-40% range. Of course it also varies over time. Examples:

    40% – https://blogs.law.harvard.edu/willbanks/2013/08/25/top-20-nations-listed-by-company-market-cap/
    37% – http://inflation.us/countryshareofglobal/
    34% – http://visual.ly/top-10-countries-world-stock-market-capitalization

    I have not yet found any cite supporting the 50% figure, apart from the funds’ own breakdowns such as the one you give.

  • 71 Andy March 13, 2015, 9:14 pm

    I just googled US share of global market cap. There are a couple of links giving the US about 35%. Quite different from the 50% weighting in the MSCI and FTSE World indices.



    Any ideas why this is so? I suppose the indices are mainly large cap, so perhaps there are more small caps outside the US, but I doubt that. Maybe the indices exclude some markets, but I can’t imagine what they are excluding.

  • 72 Dave P March 14, 2015, 6:52 am

    I think that Lars Kroijer makes very valid points and I used his strategy (ie a single, Global Tracker) for some years.

    But these days I’ve moved away from that and towards an allocation that gives me the most even sectoral allocation I can manage.

    Don’t get me wrong – I’m not claiming edge (or maybe I am) but we don’t know which sector is going to boom or bust next. And it’s all very well talking about “Efficient Markets” but markets develop bubbles and at times the Global Market (judged in hindsight) has been overweight in certain sectors – in tech, in banks, possibly more recently in oil etc.

    Now I’m not looking for out-performance, I just don’t want to find that my portfolio has become overweight in the next “Bust” sector which has been bid-up globally.

    The market isn’t always right, don’t put all your eggs in one basket etc…

  • 73 Gregory March 14, 2015, 10:59 am
  • 74 Topman March 14, 2015, 1:12 pm

    @Andy et al

    Lars ‘enters the fray’ by saying (Investing Demystified – Page 61), “….. some world indices do not include all the countries with functioning equity markets …..”, implying that these indices thus overstate their constituents’ % shares vis à vis the full global market breakdown.

  • 75 Topman March 14, 2015, 2:43 pm

    @DaveP “The market isn’t always right …..”

    I’m sure that’s probably true but without genuine edge it’s a brave man or a fool who bets against it. To do so is essentially “to claim to see an advantage from allocating differently from how the multi-trillion dollar international financial markets have allocated which you are not in a position to do unless you have an edge.” (Investment Demystified, page 57)

    I carry no special torch for Lars Kroijer but I do find the overarching theme of his book very compelling.

  • 76 Tim G March 14, 2015, 5:19 pm

    I’m perfectly happy with the principle of basing my portfolio allocation on the market, not pretending to possess an edge that I don’t really have, and not worrying too much about the finer points of the detail.

    However, I’m not sure there is a single fund that actually embodies this approach – i.e., one that doesn’t overweight the US and underweight/exclude emerging markets – and also has low charges.

    I wonder whether it’s better to bite the bullet on this one, track down reliable figures on global capitalization by country and put together a selection of funds that broadly reproduce the market.

    The following chart suggests a figure of 37% for the US in 2014 and would put emerging markets at around 15%:


    You could reproduce this with a developed world ex-UK, a UK and an emerging markets tracker in a proportion of 80:5:15. (And this would also allow you to up the UK share to include home bias, if that’s your preference, or reduce the emerging markets share if you find it too scary.)

  • 77 Topman March 14, 2015, 10:05 pm

    @Tim G @Andy

    A rough comparison with the Tim G link table seems to show that the FTSE All-World Index is primarily underweight Asia. A fuller comparison would nail all the differences large or small but I’m time poor just now. Anyone have a spare hour?

  • 78 Topman March 14, 2015, 10:35 pm

    @Tim G

    On reflection, I wonder if the differences are basically down to nothing other than the fact that the FTSE All-World specifically represents the performance 0f large and mid cap stocks only?

  • 79 oldie March 15, 2015, 12:10 pm

    It is useful to separate the world based on GDP and market capitalisation. Some countries have more businesses in private or state hands than publically investible. Look at asia in particular.

  • 80 Topman March 15, 2015, 5:38 pm

    One small final thought. Comparing the “safe bets” of a Vanguard Life Strategy 20% Equity Fund with a VGOV 80% plus VWRL 20% portfolio, the former does appear to have more risk since it has only about 11% of its total “Bonds” allocated to straightforward gilts, with the majority of the remainder being instead allocated to “Bonds – Global”. This might be unhelpful were we ever to face another “run for the hills” situation.

  • 81 Learner March 15, 2015, 11:06 pm

    Ok, so is there a list of world indice trackers sorted by fee anywhere?

  • 82 grey gym sock March 15, 2015, 11:59 pm

    i think the main reason for the higher US weighting in the FTSE All-World Index is that the index is of “investable” equities, i.e. it excludes both:

    1) large blocks of shares held by a single investor. so if a single shareholder has 75% of the shares in a company, the company will only be given a weighting proportional to 25% of its market capitalization. this can happen in any market, but perhaps the effect is biggest for chinese companies in which the PRC has a majority shareholding. this may affect the weightings for both china and for HK (since some mainland companies are listed in HK).

    2) share which foreigners aren’t allowed to buy, or not easily able to. this currently includes certain classes of share (“A” shares) in some mainland chinese companies (though these restrictions are gradually being relaxed).

  • 83 Geo March 16, 2015, 10:39 am

    I quickly did this with a spare moment hope it helps someone:


    World index funds, (not ETF’S)

    L&G International Index
    Index = FTSE World (ex UK)
    Number stocks = 2283
    OCR = 0.13%
    US Exposure = 55%
    Emerging Markets = YES (8%)

    Vanguard FTSE De World ex-UK
    Index = FTSE Dev World ex-U.K
    Stocks = 2019
    OCR = 0.15%
    US Exposure = 56%
    Emerging Markets = NO

    Fidelity Index World
    Index = MSCI World Index
    Stocks = 1644
    OCR = 0.20%
    US Exposure = 52%
    Emerging Markets = NO

    Aviva Intl Index
    Index= FTSE World (ex UK)
    Stocks = 2252
    OCR = 0.26%
    US Exposure = 55%
    Emerging Markets = YES (8%)


    Other options /additions

    Vanguard LifeStrategy 100%
    Index= notional
    Stocks = 5742 0.24%
    US Exposure = 40%
    Emerging Markets = YES (7%)
    Contains Home Bias / UK Exposure = 25%

    Vanguard Global Small-Cap
    Index= MSCI World Small Cap Index
    Stocks = 4219
    OCR = 0.38%
    US Exposure 60%
    Emerging Markets = NO


    What’s interesting is the make-up of Vanguard LifeStrategy means it includes a huge amount of extra stocks – I am guessing probably the small caps stocks in full country indexes, which although it has home bias means it is much better diversified.



  • 84 Tim G March 16, 2015, 12:00 pm


    So – we don’t know what the global market really looks like, and ‘global’ trackers don’t seem to make much attempt to follow it anyway.

    There is even a HSBC ‘global’ tracker that is 50% UK equity – a reminder to read the ingredients list carefully!

  • 85 Topman March 16, 2015, 1:20 pm

    @Tim G

    With all the various spurious accuracies in these “globals”, I guess you pays your money and you takes your choice (which phrase apparently first appeared in print in a Punch cartoon of 1846).

  • 86 raluca March 16, 2015, 2:35 pm

    If investing in a world fund at adequate prices would be possible then I would be all for it. But where I’m living, I can’t do that unless I’m willing to shell out 5% commission to my broker. Not everyone has access to cheap index funds and this question is not as clear cut in the “unsophisticated” countries.

  • 87 Eagleuk March 16, 2015, 9:23 pm

    The total world equity tracker makes a lot of sense.Not everyone has got the heart to see the country specific portfolio in red for good 8 years.No one knows exactly when market is going to be up or down.A lot of people are buying emerging market growth on the basis of latest performance but they have to keep in mind that emerging tracker markets can go down by 50% if us is down by 25%.

    We need to look at the average performance of the markets and not just recent.I was going through morningstar India mutual funds data and their average performance is 15% for last 10 years.If we add currency losses then it goes further down.
    The DB x-trackers India equity data is matching the morningstar Indian trackers data closely but what is the point in buying when average performance is not more than total global equity tracker and unnecessary purchase add further expenses to the portfolio.

  • 88 Topman March 16, 2015, 9:47 pm

    @Geo “….. the make-up of Vanguard LifeStrategy means it includes a huge amount of extra stocks …..”

    Rather than that and unless I’m completely wrong, is it not the case that comparing VWRL for example with LS100 the total of USA and UK is 58% and 63% respectively, i.e. not a hugely significant difference but nevertheless containing a major swing in home bias from the USA 51% UK 7% in VWRL to the USA 40% UK 23% in LS100, and that it would in fact be a comparable home bias swing for the funds you have shown, not extra stocks, that is the essential cause of the LS100 situation you have highlighted?

  • 89 Gregory March 17, 2015, 9:44 am

    @Lars Kroijer Congratulations Lars! This is the 89. comment! I hope more and more people read Your book.

  • 90 Geo March 17, 2015, 9:56 am

    @Topman – yes the home bias is the big difference for LS100, but also number of stocks. What is mildly interesting is, if like me you looked at the region breakdown of the funds within LS100, the number of stocks in them varies greatly:

    LS100 US=3490 PAC=150 JPN=314 UK=550 EU=399 EM=839
    L&G US=731 PAC=246 JPN=475 UK=0 EU=419 EM=994

    Total stocks
    LS100 = 5742
    L&G = 2283
    VRWL = 3026

    The vanguard ETF (VWRL) just adds 130 UK stocks.

    I wasn’t comparing it to VWRL in the first place unfortunately as this was just to give some help to people wanted to buy funds.

    Not sure but this is probably getting too detailed. The indexes have to have makeup rues and just choose by weighted market cap I think.

    If choosing ETF’s I think VWRL is the bees knees, if choosing funds on a pure Global basis L&G is probably best, LS100 was just an interesting comparison. I’m a fan of LS 60/40 as it does everything without my brain even having to think about anything – not sure why I am writing these detailed comments, other than to hope to help other people a tad.

  • 91 Vanguardfan March 17, 2015, 10:06 am

    @geo, don’t apologise, I for one am finding this info really interesting – just the sort of detail I’d never get around to looking out myself, but it’s fascinating to see just how variable what looks superficially like the same ‘product’ actually is. It would be great if TA could run with this and perhaps explain the differences or help us work out what to look for in a global index tracker. When he’s finished the book that is 😉
    I’m really hoping his book will be the kind of entry level UK focused guide I can give to my teenage children…the older is currently lapping up ‘millionaire teacher’ but I’m not sure he will get the differences with the US situation.

  • 92 Geo March 17, 2015, 12:14 pm

    I thought I had made a calculation error on the total number of stocks in the L&G fund, however none of the funds it seems actually truly follow the index….

    Total stocks:
    L&G = 2283 / FTSE All world ex UK Index = 2865
    VRWL = 2841 / FTSE All world Index = 3026

    I guess you lose the smaller stocks. What difference this makes? Who knows? Unless you could maybe see it in the benchmarking over 30 years.

  • 93 Tim G March 17, 2015, 12:39 pm

    I wonder whether the whole concept of a ‘global market’ in equities is valid.

    Let’s imagine a very simplified world in which there are only three countries: A, B and C. They are all the same size and all of their investors invest equally in the equities of all three countries. Now imagine another world, consisting of countries X, Y and Z, in which all the investors invest exclusively in home equities.

    We can describe both of these situations as a global market in which ‘the money’ suggests we should split our investment equally between the equities of the three countries. However, in the first case this global allocation is indeed the result of money flowing between the different countries, while in the second it is just a statistical artefact, produced by aggregating the results from separate markets. Perhaps the investors of X, Y and Z are just a bunch of irrational xenophobes. In which case we will probably do better to diversify our holdings between their nasty little countries. Or perhaps they are wisely investing in their home markets because of extreme currency volatility, tax disadvantages of overseas investment etc. If the latter is the case, then we might be well-advised to follow suit.

    Obviously, in the real world money does indeed flow between national equity markets to some extent, but I’m not sure that it does so to quite the degree that efficient market theorists suggest. If you think about your own approach to investment you will probably see a couple of reasons why.

    The first is that most investors do indeed display home bias. If we assume that home bias is irrational, then we can ignore it. But if home bias is rational, then we have to take it into account. The jury is still out on this one, but it’s worth nothing that Vanguard research for the US, UK, Canada and Australia over the period 1988 to 2011 suggests that for investors in all of these countries some degree of home bias was advantageous (see Figure 1):


    The second reason is that, as well as choosing between different equities, we also choose between equities and other products. For example, when deciding on a portfolio allocation, we choose between equities and fixed income. In this instance, our ‘market’ therefore consists of both shares and bonds. And we may also consider other options such as cash, buy-to-let or staking it all on The Flying Dutchman in the 1.45 at Cheltenham. So it’s not at all clear where one market ends and another one begins.

    Does this matter? Well, it’s one thing to say ‘we should capture the global equities market because this reflects the aggregated decisions of investors across the world’ and quite another to say ‘we should capture the global equities market because this reflects a small portion of a whole bunch of decisions taken in a series of only partially interconnected markets’.

    If the market is truly global, then any decision to diverge from it is, at least implicitly, a claim to edge. If, however, the market is not global, then behaving as if it is could lead us into the reassuring but mistaken belief that ‘the market’ has decided to ignore issues such as home bias and currency risk, and that we should too.

    I would argue that the global asset allocation partially reflects a general search for a balance between risk and returns (countries A, B and C) but is also the result of aggregating together quite separate decisions about home bias and currency risk (countries X, Y and Z). The first set of decisions can be combined as an average, but the second can’t. In this case, by simply tracking a global index we are unwittingly according priority to a general risk-return consideration but ignoring country-specific considerations. If home bias and currency risk are real, then we might do better to weight our equity investments somewhat to our home countries, and to steer clear of being over-invested in any single country (e.g., the USA). If this feels like going against the market, just remember that ‘the market’ also consists of US-based investors for whom home bias and currency risk have a different meaning, and (for example) Chinese investors seeking an overseas haven for profits generated in their emerging but still in many ways insecure home economy. Their decisions might be rational for them but bad for us.

  • 94 Topman March 17, 2015, 1:23 pm

    Just returning to my own Lars influenced c.100k rational portfolio if I may, which consists merely of VWRL and VGOV plus an instant access NISA, I did consider using LS100 in lieu of VWRL but the deciding factor in favour of my ultimate choice of VWRL was my conclusion, rightly or wrongly in my ubiquitously simplistic mind, that VGOV meant that I was already effectively long on the UK and that I could therefore “afford” to be long on the USA in VWRL.

    @Gregory – “Congratulations Lars!”

    Amen to that!

  • 95 Barry March 22, 2015, 9:30 pm

    Great article but what exactly is the name of the world tracking fund please….?

  • 96 Tim G March 23, 2015, 12:46 pm

    @Barry “Great article but what exactly is the name of the world tracking fund please….?”

    There’s a lot of added value in the comments, so might be worth trawling through them. You could start with comment 83 by Geo, which gives a good summary of available products. (Be warned that, as far as I can tell, at least for UK investors, there is no single, cheap product that embodies Lars’ approach.)

    Also, while I agree that this is a great article, I would be inclined to treat it as food for thought, rather than a simple “read and apply”. In the comments, there are a lot of questions raised, including:

    1: How specific funds map (or fail to map) onto the global market, including analysis of fund contents and costs.

    2: Problems with identifying how the global market breaks down in terms of country weightings (e.g., ranges of from 40 to 60% for the US, depending on who you believe!).

    3: Whether the efficient market hypothesis really provides a basis for equity allocation decisions by individual investors: i.e., are we right to ignore home bias and currency risk?

  • 97 Topman March 23, 2015, 1:21 pm


    Up to a point I agree with Tim G about the worth of “trawling through the comments” but it does seem to me that many and perhaps most of these comments have been made without their authors actually having read Lars Kroijer’s book, Investing Demystified.

    I strongly recommend that you do read it before you take any action; its language is clear and eminently uncomplicated but it is far more than just the beginner’s primer that its title might imply.

  • 98 Lars Kroijer March 23, 2015, 1:43 pm

    Thanks again for comments. I know it is just a small subset of Monevator readers on this comments thread, but I was thinking of hosting a talk in London for 50ish people in the next 4-5 weeks where people could come and chat about the stuff in this blog, and general investor issues. Do you think there would be an appetite for this?

  • 99 The Investor March 23, 2015, 10:23 pm

    @Barry — As TimG says, there’s a lot of discussion in these comments. I can also reveal an imminent article on this subject is headed Monevator’s way, so watch this space! 🙂

  • 100 Topman March 24, 2015, 4:50 am

    @Lars “….. an appetite …..?”

    Thanks but no thanks in my case; you would be preaching to the converted. ~:-)

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