Why do I invest in a global index when the S&P500 always wins?

leosayer

Chasing performance is the one way that many investors lose money.

You'd be kicking yourself if you switched to an S&P500 fund and then America crashed. I can think of dozens of reasons why the US market might fall behind. Isolation due to tariffs / natural disaster / new pandemic / cyber attacks....who knows?

At least with a global equity fund, you know your will always capture the growth from any outperforming country.

GeoffTF

I had a look at the last six months on Morningstar. I compared VUSA with VWRL and VUKE. The results were 92.9, 97.2 and 107.3 respectively. In GBP terms, the world beat the S&P 500 by 4.6% and the UK beat it by 15.5%. Six months ago we had lots of people asking about investing in the S&P 500, and nearly everybody said that a UK bias was a bad idea.

london21

Global index slightly less risky compared to S&P500. 5/7 compared to 6/7 risk wise looking at the KID doument. 

thunderroad88

SneakySpectator said:

I'm invested exclusively in VWRP which is a global index fund. I chose this because I read countless articles about concentrating all your money to one country can be risky, even if that country is the United States. 

And it made sense at the time, I thought I was being smart and risk averse by opting for a more balanced global index but at the years tick by I can't help but regret my decision. It's not like VWRP isn't going up, it is, but the S&P500 is going up more. 

Look at the chart of VWRP/SPY 

The S&P500 has done 15.40% better than VWRP, which for an index fund is pretty remarkable, that 15.40% difference is essentially the rest of the world underperforming relative to the US. 



You can see that 35.5% of the fund is outside the US, which is what's causing it to drag compared to 100% US fund. 

People have also told me that the global market goes through cycles where the US does well, then the rest of the world does well while the US doesn't do so well etc. Basically investors cycle from US > rest of world > US > rest of world etc. 

But I'm not really seeing it? To illustrate this, here's a screenshot of the Vanguard total world stock VT/SPY

 
So if you invested in VT since 2008 rather than the SPY you'd be 46% worse off. That is staggering. So this current US cycle has lasted 17 years now... Where is this market cycle / rotation everyone speaks about?

The OP posted this on another thread on 1st May

“all we can do is try our best and I genuinely believe the best option is a low cost global index fund over a 25 year period”

That genuine belief didn’t last very long then…sounds like a performance chaser to me.

GazzaBloom

Being invested in the global index is a bet on capitalism and businesses continuing to be successful in aggregate wherever they are based or listed but many of which are US based and generate a significant portion of their revenues from the US.

Being invested in the S&P500 is a bet on a smaller group of businesses that happen to be headquartered in the US and listed on the US stock exchange but many of these 500 businesses are global giants that generate revenues from all across the world but with a majority portion from the US.

Comparisons to previous global economic cycles may or may not be so relevant today with the growth, through the 2000s, of internet globalisation and e-commerce. No-one will know until we look back 20 years from now.

In my opinion investing in either should serve you well over a 20-30 period, one index may head the other at different times but they should both rise over time with some sharp sudden drops along the way as institutions withdraw large sums of money from equity markets in a short term response to whatever bad news occurs.

It may be worth focussing on other areas of personal finance, such how much you save and invest, via what method (pension, salary sacrifice, ISA, cash) what debts you may have, do you own a house, how much tax you pay, how you can increase your income, what life goals you need to fund and when, etc...

Focussing on these will have a far bigger impact on your future financial success that sweating about percentage differences in index returns.

if you're still feeling FOMO with regards to the S&P500, go half and half with a global index, yes, there will huge overlap but you no longer feel like you are missing out.

SneakySpectator

GazzaBloom said:

Being invested in the global index is a bet on capitalism and businesses continuing to be successful in aggregate wherever they are based or listed but many of which are US based and generate a significant portion of their revenues from the US.

Being invested in the S&P500 is a bet on a smaller group of businesses that happen to be headquartered in the US and listed on the US stock exchange but many of these 500 businesses are global giants that generate revenues from all across the world but with a majority portion from the US.

Comparisons to previous global economic cycles may or may not be so relevant today with the growth, through the 2000s, of internet globalisation and e-commerce. No-one will know until we look back 20 years from now.

In my opinion investing in either should serve you well over a 20-30 period, one index may head the other at different times but they should both rise over time with some sharp sudden drops along the way as institutions withdraw large sums of money from equity markets in a short term response to whatever bad news occurs.

It may be worth focussing on other areas of personal finance, such how much you save and invest, via what method (pension, salary sacrifice, ISA, cash) what debts you may have, do you own a house, how much tax you pay, how you can increase your income, what life goals you need to fund and when, etc...

Focussing on these will have a far bigger impact on your future financial success that sweating about percentage differences in index returns.

if you're still feeling FOMO with regards to the S&P500, go half and half with a global index, yes, there will huge overlap but you no longer feel like you are missing out.

Nah I'm not going to mess with it. Chopping and changing from fund to fund is just going to introduce emotion into my investing and I don't really want that. In 25 years when I retire hindsight may be that I obviously should have gone with the S&P500, or it maybe that actually a global fund was better over the 25 years. 

John464

Looks like Trump is about to slap a tariff (tax) on passive income like dividends going to countries he doesn't like?
So at least your world tracker should mitigate that?

Hoenir

SneakySpectator said:

 Chopping and changing from fund to fund is just going to introduce emotion into my investing

No emotion if judgements are made on the basis of underlying fundamentals. If 10% of your ideas are ultimately successfull you'll be doing well. Having conviction to back ones own ideas fully is where the money is made. 

aroominyork

My approach is only to invest in ways which, if they went badly, I could not say they were bad decisions but just unfortunate. I have a few tilts like UK smaller companies, being underweight US and holding some actively managed corporate bonds funds. But I would never go 100% US: that would go very strongly against my strategy.

GeoffTF

Hoenir said:

SneakySpectator said:

 Chopping and changing from fund to fund is just going to introduce emotion into my investing

No emotion if judgements are made on the basis of underlying fundamentals. If 10% of your ideas are ultimately successfull you'll be doing well. Having conviction to back ones own ideas fully is where the money is made. 

...and lost.