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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