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Returns of different global stock markets

Investing in shares can be a complex old affair.

Even if you strip out all the complexity (and time wasting) involved with picking individual shares and have decided to invest through market tracking ETFs, then there are still hundreds to choose from. Growth stocks, income stocks, different countries, different regions, dividends reinvested, dividend distributed…the choices go on.

How should you know what to invest in?

Today, we shall try to help you narrow down your options a little. However, before I start, let me remind you of the importance of diversification – even if one country/region provides the best historical returns, it doesn’t mean you should throw 100% of your savings into this ETF!

 

 

Global Stock Market Returns – The Summary

Let’s start with the summary. We have provided two comparisons below:

1)       Global stock market returns data since becoming available for each market. This often provides a longer historical time frame and hence “average” returns may be more accurate. However, the results  between different countries are not directly comparative as they are taken over different time frames and economic periods.

2)      Global stock market returns data since 1984. Often a shorter time frame, but this has the benefit of being looked at over a comparative period.

 

The information shown is:

a)      20 year return (average) – this shows the average annual return for each 20 year period within the data set.

b)      High – this is the highest annual return noted over a 20 year period within the data set. Essentially, this is the best you would have ever done.

c)       Low – this is the lowest annual return noted over a 20 year period within the data set. Essentially, this is the worst you would have ever done.

 

 

It is very important to note that, for comparison purposes with other investments, these figures are not inclusive of dividends.

 

Global Stock Market Returns Since 1984 Comparison

For comparative purposes, I think that the data since 1984 would be the most appropriate to analyse.

The highest 20 year annual return comes from the NASDAQ at 9.1% and the worst actually comes from the FTSE 100 at 5.3%.

We could spend a lot of time analyzing the differences between these markets. However, I’m going to let you do this yourself and I’m going to skip to a much more important comparison and message!

 

The important messages

The summary table above does not scream at me that I should be investing in the NASDAQ instead of the FTSE, or the Hang Seng instead of the TSX.

What does stick out is two points:

1)       High Returns – the average annual return across all these markets over a 20 year period is 7.0% per year. If we dividends into this, then we are probably getting somewhere close to 10.0% return per year. If we compare this to the current 20 year government bond rate (which bank interest rates will generally reflect), we would only get a 1.86% return per year.

2)      Lack of Variance – the second factor shocked me the most. We always think of the stock market as being a very volatile beast. For example, between March 10th 1999 and October 4th 2002, the NASDAQ lost 78% of its value. This would appear devastating to anyone invested. However, over 20 year periods, the impact of these dramatic falls is almost always wiped out. The lowest possible 20 annual return from any of these markets since 1984 is the FTSE All Share between March 1989 and March 2009, which still returned 3.1% per year, not including dividends.

 

It’s because of these two factors that we recommended investing in the stock market LONG-TERM!

If you need your money in 3 years to buy a house, you shouldn’t be invested. Your £200k house may seem a long way away if you put your £40k deposit into the NASDAQ in March 1999 and 3 years later it was only worth £8k.

However, if you have a long-term (over 10 years) time frame to invest, then you should seriously consider getting your cash into shares (preferably through a pension scheme or ISA in order to avoid tax).

 

Are you still scared?

Many people are still worried about putting their money into the market as they think they will lose it all. Well, to make you feel a little better about it, here is a summary based on the same historical data showing the “low” annual return if you invest over 20 years, 19 years, 18 years, etc etc…

The two worst case scenarios noted in the data set are:

1)       Longest period with a negative annual return – FTSE 100 – 14 years. In this scenario, you could be invested in the market for 14 years and still have negative annual returns. This does seem pretty terrible. However, fear not, within 6 months, this would have returned to a positive return. Moreover, this doesn’t include dividends over this period which would also boost your returns.

2)     Largest 10 year annual loss – NASDAQ – 7.1% per annum loss. This is the result of the aforementioned dotcom bubble. The market fell 78% in 3 years, and therefore for the ten year period including this we have a fairly large annual loss. However, we need to put it into perspective again. Firstly, 12 months later, you would be back to positive. Secondly, this still ignores dividends. Thirdly, this will only be relevant if you invested 100% of your funds in February 2000. If you dollar cost averaged at all (as we recommend), your returns would be much better over an averaged ten year period.

 

Conclusion

The same as ever: if you are looking to invest for 8-10 years or more (make sure that you are), then a good proportion of your assets should be allocated to market tracking ETFs.

Get them in tax wrapped accounts, work with a low-fee broker, diversify your holdings across several markets, and then just forget about them.

In 30 years’ time, you will be extremely wealthy!