The great financial educator William Bernstein said: “You have to understand what market history looks like. What market history tells you is that the very, very best investments are made when things look the worst.”
It’s for similar reasons that I write so often about the past. I want to try to understand what fleeting or lasting horrors my investment choices might inflict even before any rewards come due.
This means examining as fully as possible the asset classes that comprise today’s investing mainstays.
First-world problems
Most Monevator readers’ portfolios are dominated by World equities – that is, developed world stocks.
But there’s a problem if you want to know how the World index has performed over the long-term.
Which is that the two benchmarks that stretch back farthest are pay-walled.
Fair enough, I suppose. Professors’ Dimson, Marsh and Staunton’s [1] DMS database and Global Financial Data’s indices [2] are both based on exhuming stock returns from fusty old journals and ancient newspaper archives. Someone’s got to keep the wonks fed and watered.
But that doesn’t help the investor in the street. People like us who are keen to avoid becoming investors out on the street, by educating ourselves in the ways of the investing world.
True, you could simply use the MSCI World’s easily-accessed tale of the tape. Its data runs from 1970.
But in my view that paints too benign a picture.
No Great Depression, no World Wars, no decade of deflation, no deglobalisation.
While 50-odd years sounds like a long time, we can only really see how equities responded to a wide set of conditions by retrieving the greater part of the 20th Century.
Introducing a new world index
We need more open-source data. And I’ve found it!
Enough to create a World index reaching back to 1919:
- I’ve taken historical country-level stock market returns from the Macrohistory database [3].
- I then weighted each country using stock market capitalisation data from the paper, The Big Bang [4]: Stock Market Capitalization in the Long Run.
- Then I currency-converted all the results to GBP1 [5] using exchange rate data from the Macrohistory team.
This process enabled me to assemble a World index in GBP that begins in the aftermath of World War One. At the other end of the timeline, the new index segues into the MSCI World GBP from 1970.
The resulting World equity index is not perfect (and I’ll explain why further down) but I believe it’s good enough.
So I’ll use this index to represent the World equities portfolio in future Monevator long-term performance articles.
In the meantime, the rest of this article will chart how world equities have fared from 1919 to 2023.
Then I’ll briefly pop the bonnet on the index as a treat for the hardcore at the fag end – I mean the grand finale – of this piece.
Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends, but strip out the vanity growth delivered by inflation that does nothing to boost your actual spending power. Local currency returns have been converted to GBP.
World index: long-term equities growth
Here’s the World equities growth chart using our new index versus two rival long-term benchmarks: US and UK equities [6]:
[7]
Data from JST Macrohistory [3]2 [8], The Big Bang [4]3 [9], MSCI [10], Aswath Damodaran [11], and FTSE Russell [12].
August 2024
The graph reminds us again that the rest of the advanced world has struggled to keep pace with US equities [13] since the mid-1990s, aside from a brief panic room huddle during the Global Financial Crisis [14].
We can also see that home bias cost UK investors dearly throughout – even though the UK has remained one of the world’s top-performing markets over time.
World index annualised returns in GBP (% per annum)
Let’s now look at the long-term average real return numbers with dividends:
| 2023 | 10 years | 20 years | 50 years | 105 years | |
| World equities | 8.9 | 8.4 | 6.7 | 5.5 | 6.7 |
| US equities | 16.5 | 11.6 | 8.3 | 7.5 | 7.7 |
| UK equities | 0.6 | 2.3 | 4 | 6.2 | 5.6 |
The US wipes the floor with the rest of the world across every timeframe. Particularly in the last ten years as the ascendency of Big Tech [15] – and its concentration in US stock markets – has left competing sectors [16] looking like yesterday’s news.
It would be interesting to see whether the US still dominates in an alternative world with the Big Tech winners stripped out. We’ll save that for another time.
World index: annual returns
[17]
Annual World index results resemble any other crazy equity returns chart. They look like an abstract cityscape of soaring skyscrapers and deep shafts boring into negative space.
Happily however the towering returns outnumber the dark days lost in bunkers.
Thus somehow our long-term financial wellbeing emerges from this profile of sky-dwellers and underlanders.
Annual returns: World vs US vs UK stock market indices
A question: does diversifying across the world take the edge off those trips to the bargain basement?
[18]
This chart indicates that the World index might provide some downside protection relative to single country markets.
The cyan bars seem to punch shallower holes than the USA’s red. Though also notice how dynamically America tends to bounce back.
Drawdowns: World vs US vs UK stock market indices
[19]
This is the trauma room chart: a raw record of loss and terrible stock market slashes. All the same, you can see how the Great Depression is mitigated by the World index versus the US during the 1930s. (The impact of the Great Depression was not so severe in the UK, for one thing.)
World War 2 and subsequent recessions were also typically blunted by a World stock assemblage.
A notable exception is the early 1990s slump when the Japanese stock market bubble burst. The Tokyo stock exchange comprised over 40% of the index in 1989 but it made up only 11% ten years later.
Holding the World portfolio also exacerbated the Dotcom Bust of the early 2000s, as Japan continued to sell off and the UK piled on the pain too.
The risk-adjusted view
All told, our eyes do not deceive us. The numbers show that the World index has inflicted less volatility on investors over the long-run (1919-2023):
| Index– | Annualised return– | Volatility– | Sharpe ratio |
| World | 6.7% | 17.4% | 0.38 |
| US | 7.7% | 19.7% | 0.39 |
| UK | 5.6% | 20.5% | 0.27 |
The higher your Sharpe ratio, the better your risk-adjusted returns. That is, the more return you get per unit of risk as measured by volatility.
From this we can conclude that the World has proved about as worthwhile a buy as the US when returns are costed against the volatility you endured to attain them. (This is the essence of the Sharpe Ratio measure.)
Viewing the benchmarks on the single dimension of returns would imply that world equity diversification [20] has proved sub-optimal, compared to if you’d gone all-in on the US.
But taking that broader view reveals how the rest of the world offers good reason not to pin all our hopes on perpetual American exceptionalism.
World index market share
The MSCI World is utterly dominated by the US stock market these days. It currently weighs in at a 71.7% share of the index:
[21]
Source: MSCI [22]. August 2024
Our investing fate is inevitably reliant on the world’s most important capital market, though that’s nothing new.
This next chart compares the market capitalisation of each of the major developed world stock markets:
[23]
Source: The Big Bang [24]. August 2024.
We can see that the US has almost always been the biggest player – offset to a greater or lesser degree by the UK, Japan, France, Germany, and the plethora of smaller fish known as ‘Other’.
Since 1919, the US share of the world market has ranged from 31% (1988) to 73% (1951).
For what it’s worth, the US is close to its historical ceiling right now [25].
Inside the World index
I want to emphasise that the World index presented here is not the global index.
I’m relying on MSCI World figures from 1970 onwards. That index excludes the emerging markets. Its Asian representatives are limited to Japan, Singapore, and Hong Kong.
Pre-1970, I use Macrohistory’s country list. That is limited to the Anglosphere, Japan, and Europe.
Macrohistory’s research omits Austria, New Zealand, Ireland, and Eastern Europe.
Indeed, it’s the absence of Austria and Russia that enforced our 1919 cut-off. Those two imperial stock markets weighed about 5% each before World War One intervened (by the light of the DMS database).
South Africa is the other notable no-show. Its stock market accounted for a couple of percentage points of the whole during most of the period.
Every benchmark makes some exclusions for reasons of practicability. Ours are imposed by the limits of publicly available data.
Even so, we’re happy that our numbers are a credible representation of the historical World index. The loss of fidelity versus commercial alternatives doesn’t change the lessons we can learn.
Finally, I’d just like to thank the academics responsible for the Macrohistory database and The Big Bang research. They have created an immense resource and been incredibly generous in freely sharing it with the world.
Thank you Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor, and Kaspar Zimmermann.
Take it steady,
The Accumulator
- British Pounds Sterling. [↩ [30]]
- 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. [↩ [31]]
- Dmitry Kuvshinov and Kaspar Zimmermann. 2021. The
Big Bang: Stock Market Capitalization in the Long Run. Journal of Financial Economics,
Forthcoming. [↩ [32]]