Along your investment journey, you will definitely examine your investment returns and compare them to the market’s benchmarks and the most “hot” stock in the news. You might also ask yourself: am I beating the market? Therefore, I think it is both interesting and helpful to examine the most common benchmarks and the top performing stock of the last ten years.

EXPECTED RETURNS

When you invest, it is helpful to know:

1) the returns you expect (dead money, safe money, healthy money, wealthy money) and

2) what the market can offer in terms of returns.

Both aspects are important. Although not mutually exclusive, these two categories don’t necessarily overlap.  The VEN diagram might help visualize the intersection between the returns you are looking for and what the market (and the different asset classes) can offer.

For instance, do you expect 3%, 5%, 10%, or 20% returns or more from your portfolio? Before going wild with expectations, it makes sense to remind ourselves of two major stock indexes widely used as benchmarks: the S&P500 Index and the MSCI World Index.

THE S&P500

The S&P500 is a major US stock market index. It tracks the 500 largest US companies. The index weights its constituents by free float market capitalisation. It is also the benchmark most financial journalists and investors use to judge the performance of companies, fund managers, and retail investors.

• Many ETFs track the S&P500 index. Some of the most known are the Amundi S&P500 UCITS ETF acc, iShare Core S&P500 UCITS ETF (Acc), Vanguard S&P500 UCITS ETF, SPDR S&P500 and UCITS Acc ETF.
• The average annual return of the S&P500 Index in the last 100 years is around 10%. Adjusted for inflation, it would be around 7%. (Over the last 40 years, the annual return is slightly higher, at 11%).
• To put it into perspective, using the Rule of 72, a 10% annual return would double in 7.2 years.
• With its 100% focus on 500 US companies, such an index is geographically concentrated and linked to “only” 500 companies.
• Considering an initial investment of 100,000 USD in the S&P500 and simulating an average annual return of 10%, we would have more than 1.8 M USD after 30 years. (In this simple simulation, we don’t include monthly or annual deposits of additional investments).

THE MSCI WORLD

The MSCI World Index is an international equity index. It captures large and mid-cap representation across 23 Developed Markets (DM) countries. It is an alternative benchmark to the S&P500; it has a broader geographic representation, with a basket of  1,430 companies. It covers approximately 85% of each country’s free float-adjusted market capitalization.

Stocks from the USA make up the biggest weight in the MSCI World index with 70.64%, followed by Japan (6.06%) and the UK (4.00%). The top sectors within the MSCI World Index are information technology (23.22%), financial services (15.36%), and healthcare (11.99%). (Source: MSCI; As of 30/04/2024).

(Extra note: You might find offers from a similar MSCI Index, the  MSCI ACWI. However, the latter is the All Country World Index, which includes 23 developed countries and 24 emerging markets countries. However, emerging markets are weighted 10.36%). Still, it is a different index and is less commonly used as a standard benchmark).

While the MSCI World Index is an equity index, it provides more diversification (currency, markets, industries) than the S&P500 Index. However, knowing that the US Equity market is the locomotive of the global economy and the financial markets, we must accept that the higher diversification provided by the MSCI World Index might bring lower returns than the S&P500.

• Here is a list of the most known ETFs that track the MSCI World: Amundi MSCI World II UCITS ETF dis, SPDR MSCI World UCITS ETF, Etradfkers MSCI World Swap UCITS ETF 1D, Ishares Core MSCI World UCITS ETF USD (acc).
• The average annual return of the MSCI World Index in the last 100 years is unavailable.  I could retrieve historical returns over the last 45 years for an average of around 9,7%. So, it is not a dramatically different performance compared to the S&P500.
• However, to put it into perspective, using the Rule of 72 means our investment in the S&P500 would double in 7.4 years (instead of 7.2 years).
• However, considering an initial investment of 100,000 USD in the MSCI World and simulating an average annual return of 9.7%, we would have more than 1.6 M USD after 30 years. (In this simple simulation, we don’t include monthly or annual deposits of additional investments).

SMALL REMINDER: IT IS HARD TO BEAT THE MARKET

It is important to remember that despite all the hype around beating the market, few funds and investors consistently provided higher returns over the years. Therefore, the most optimal approach for a retail investor is often to rely on well-diversified passive investment approaches, using index funds / ETFs that mimic large and well-diversified asset classes. I covered this discussion in posts on Why You Should Not Try to Beat the Market, Diworsification or Diversification, and 3 Ways to Beat the Market. A fantastic video by Professor Damodaran asks this question: Should you be an Active or Passive Investor?

YOUR TARGET

Back to our case. Given these two well-known benchmarks, it is now “easy” to join a conversation and discuss other investments. Is your current portfolio of investments beating the market? Which of your single investments beats the market in the last 10 years?

Now, let me clarify that any sensible conversation would require much more analysis to compare apples with apples. The timeline of the investment and the “risk-reward” ratio of the investment of the underlying asset class is extremely meaningful. However, with this post, I like to focus on the returns.

So, if, based on your expectations, desires, or financial freedom number (4% rule), you are happy with either the MSCI World or the S&P500, you are golden. Buy any index from any broker that mimics either the S&P500 or all Development World Equity Market, and, historically, you could achieve around 8-10 % annual returns. If you apply dollar cost-averaging for several decades, investing every month, you will have a solid financial outlook, and achieve your financial freedom number sooner rathar then later.

TOP PERFORMING STOCK OF THE PAST 10 YEARS  

Now that we know what a reasonable annual return looks like, we are well-positioned to appreciate some companies’ rare, outstanding results that provide investors with exceptional returns. I make the case out of curiosity as material for financial education. Clearly, it is the holy grail of any investor to identify, buy, and hold at an early stage shares on the next Unicorn (a privately-owned startup business worth more than $1 billion) or Top Performing Stock. It is also the business of investor managers to market their “self-proclaimed” exceptional skills in stock-picking.

So, let’s look at exceptional examples of top performing stock in the last 10 YEARS.

From the list, you have surely recognized Nvidia Corp (second in terms of price return but first in terms of Total Return), which has been widely discussed in the news for becoming the most valuable company in the world (over 3 T USD) and for its strategic role in developing Artificial Intelligence services. Its outstanding 10 Y Total Return of 27892.4% equals an annualized 67% growth (CAGR). I admit I only know the other two companies from this list. AMD (Advanced Micro Devices Inc.) at the 3rd place (50% CAGR), and AVGO (Broadcom Inc.) at the 7th place (CAGR 46.7%).

BOTTOM LINE

I think keeping a couple of numbers in mind when investing is helpful. If you build a portfolio of equity stock, you should expect returns in line with the S&P500 or the MSCI World (around 8-10%) over a long timeline (under ten years; it could not be a statistically relevant average). If you underperform it over the years, you might need to consider relying more on a broad equity index.

To beat the market, it is important to acknowledge how hard it is to pick a high-return stock that consistently overperforms with a 15%, 20%, 40%, or 60 % CAGR.

Even if you pick up a top-performing stock in your portfolio, it won’t be your only investment. You will have other products that dilute your overall performance.

Remember that few exceptional fund managers could build a relatively long-term portfolio with 15% to 20% total returns. For instance, the well-known Warren Buffett’s Berkshire Hathaway appreciated at an annual growth rate of 19.8% during its 60 years (!!).

Another example to remember is that Bernie Madoff’s biggest Ponzi Scheme was built on the promise of “safe” 10% annual returns. The sale pitch was not the top performance but the low volatility. 10% returns was already a good enough target.

Therefore, considering diversification, simplicity, transparency, limited fees, and performance, the S&P500 and the Total Development Equity Stock (MSCI world) should be considered with great interest. This is without taking unnecessary risks or effort through active investing and wild stock picking, looking for the Top-Performing stock (the needle in the haystack).

Ultimately, remember to identify your investment strategy, your freedom number, your risk appetite, your benchmark, and your time horizon when investing.

If you like this article, check out other Financial Wisdom in my Archive, YouTube videos, and Audio Podcasts.

Enjoy your financial journey. Sweat Your Assets!