A brand new long-term world index for GBP investors

TThe great financial educator William Bernstein said:

It is for similar reasons that I often write in regards to the past. I would like to try to know what fleeting or everlasting horrors my investment decisions can trigger, even before any returns follow.

This signifies that we’d like to look at as comprehensively as possible the asset classes that form the foremost pillars of investing today.

Problems of the First World

Most readers’ portfolios are dominated by international stocks, i.e. stocks from industrialized countries.

However, if you wish to understand how the world index has performed over the long run, there may be an issue.

This signifies that the 2 longest-running benchmarks are behind a paywall.

Okay, I believe. Dimson, Marsh and Staunton’s DMS Database and Global Financial Data’s Indices are each based on digging up stock returns from musty old magazines and ancient newspaper archives. Someone has to feed and supply for the idiots.

But that does not help the road investor. People like us who need to avoid becoming street investors by educating ourselves on the ways of the investment world.

Of course, you may also simply use the easily accessible MSCI World data collection. The data goes back to 1970.

In my opinion, nonetheless, this paints too harmless an image.

No Great Depression, no world wars, no decade of deflation, no deglobalization.

Although 50 years or more appears like a protracted time, we are able to only truly understand the stock market’s response to quite a lot of conditions by considering many of the twentieth century.

Introduction of a brand new world index

We need more open source data. And I discovered it!

Enough to create a world index going back to 1919:

• I actually have analyzed the historical stock market returns at country level from the Macrohistory database.
• I then weighted each country using the stock market capitalization data from the paper.
• I then converted all results into GBP using exchange rate data from the Macrohistory team.

This process enabled me to place together a world index in GBP that begins with the period after World War I. At the opposite end of the timeline, the brand new index transitions into the 1970 MSCI World GBP.

The resulting world stock index just isn’t perfect (I’ll explain why below), but I believe it’s adequate.

Therefore, I’ll use this index to represent the world equity portfolio in future articles on long-term performance.

In the meantime, the remaining of this text will show how global stock prices have performed from 1919 to 2023.

Then, at the top – I mean the grand finale – of this piece, as a reward for the hardcore fans, I’ll briefly lift the hood onto the index.

Investment Returns Sidebar – All returns quoted in this text are real annualised total returns. That is, they’re the typical annual return (taking profits and losses into consideration) achieved over a selected period. These returns include the impact of reinvested dividends but exclude vanity growth resulting from inflation, which does nothing to extend your real purchasing power. Local currency returns have been converted to GBP.

World Index: Long-term equity growth

Here is the expansion chart of world equities using our recent index in comparison with two competing long-term benchmarks: US and UK equities:

Data from JST Macrohistory, The Big Bang, MSCI, Aswath DamodaranAnd FTSE Russell.
August 2024

The chart reminds us once more that the remaining of the developed world has struggled to maintain pace with U.S. stocks for the reason that mid-Nineteen Nineties, apart from a transient bout of panic through the global financial crisis.

We also see that specializing in the house market has consistently been expensive for UK investors – despite the fact that the UK has remained one among the world’s best performing markets over time.

Annual returns of the world index in GBP (% pa)

Now let’s have a look at the long-term average real returns with dividends:

The US crushes the remaining of the world on any timeframe. Especially within the last decade, when the rise of Big Tech – and its concentration in US stock markets – made competing sectors look like yesterday’s news.

It could be interesting to see if the US still dominates in an alternate world where the Big Tech winners are omitted. We’ll save that for one more time.

World index: annual returns

The annual results of the world index resemble every other crazy stock return chart. It looks like an abstract cityscape with towering skyscrapers and deep shafts boring into negative space.

Fortunately, nonetheless, the outstanding returns outweigh the dark days spent in bunkers.

So our long-term financial well-being in some way stems from this profile of the sky and the underland inhabitants.

Annual Returns: Global vs. US vs. UK Stock Market Indices

One query: Does global diversification take the fear out of trips to the discount basement?

This chart suggests that the world index may offer some downside protection in comparison with individual country markets.

The cyan bars seem like drilling shallower holes than the U.S.’s red bars, but additionally note how dynamically America tends to bounce back.

Drawdowns: Global vs. US vs. UK stock market indices

This is the Trauma Room chart: a raw version of the losses and terrible stock market crashes. Nevertheless, you possibly can see how the Great Depression is mitigated by the world index in comparison with the US within the Thirties. (The effects of the Great Depression weren’t as severe within the UK, for instance.)

World War II and the recessions that followed were also typically mitigated by a worldwide stock market crisis.

A notable exception is the collapse within the early Nineteen Nineties, when the Japanese stock market bubble burst. The Tokyo Stock Exchange accounted for over 40 percent of the index in 1989, but ten years later it was only 11 percent.

Holding the World portfolio also exacerbated the dot-com bubble of the early 2000s, as Japan continued to dump stocks and the UK also suffered greatly from the consequences.

The risk-adjusted view

All in all, our eyes aren’t deceiving us. The numbers show that the world index has provided investors with less volatility over the long run (1919-2023):

The higher your Sharpe ratio, the higher your risk-adjusted returns. That is, the more return you get measured in volatility per unit of risk.

From this we are able to conclude that the world has proven to be as worthwhile an investment because the US when comparing returns with the volatility that needed to be endured to realize them. (This is the essence of the Sharpe ratio measure.)

Looking on the benchmarks only by way of returns, one might conclude that diversifying global equity markets has proven to be suboptimal in comparison with an all-in strategy with the US.

But a broader view shows that there are also good reasons in the remaining of the world to not pin all hopes on everlasting American exceptionalism.

Market share on the planet index

The MSCI World is currently completely dominated by the US stock market. It currently accounts for 71.7% of the index:

Source: MSCI.August 2024

Our investment fate inevitably is determined by the world’s most significant capital market, but that is nothing recent.

The following chart compares the market capitalization of the main stock markets in developed countries:

Source: August 2024.

We see that the US has almost all the time been the most important player – kind of far behind the UK, Japan, France, Germany and a bunch of smaller fish often called “others”.

Since 1919, the US share of the world market has fluctuated between 31 percent (1988) and 73 percent (1951).

It is evident that the US is currently near its historic high.

Index “Inside the World”

I would really like to emphasise that The world index shown here just isn’t the worldwide index.

I depend on the MSCI World figures from 1970 onwards. This index excludes the emerging markets. Its Asian representatives are limited to Japan, Singapore and Hong Kong.

Before 1970, I take advantage of the country list from Macrohistory. This is restricted to the English-speaking world, Japan and Europe.

Austria, New Zealand, Ireland and Eastern Europe aren’t taken into consideration in macro-history research.

In fact, it was the absence of Austria and Russia that forced our cut-off date of 1919. These two imperial stock markets each had a weight of about 5% before the outbreak of World War I (in keeping with the DMS database).

South Africa is the opposite notable non-shareholder. The country’s equity market accounted for a couple of percentage points of the full for many of the period.

For practical reasons, certain exceptions are made for every benchmark. In our case, the exceptions are resulting from the constraints of publicly available data.

Nevertheless, we’re comfortable that our figures credibly reflect the historical world index. The lack of reliability in comparison with business alternatives doesn’t change the teachings we are able to learn from it.

Finally, I would really like to thank the scientists liable for the Macrohistory database and research. They have created an immense resource and have been incredibly generous in sharing it with the world totally free.

Many because of Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor and Kaspar Zimmermann.

Always take it easy,