"The enemy of a good plan is the dream of the perfect plan. Stick to the good plan."
The MSCI World is an index that allows investors to build a globally diversified equity portfolio with minimal effort and a single product. And unlike actively managed funds, this is possible at unbeatably low costs of less than 0.1% per year. This year the index has achieved a return of just under 20% and since its launch in 1986 it has averaged 8% per year.
Nevertheless, there has been increasing criticism of the MSCI World in recent weeks. Why?
The main criticism is the high weighting of the US market and in particular the mega-caps: Apple, Alphabet, Microsoft, Amazon, Tesla, Nvidia, Meta. These 7 stocks alone account for a share of just under 20%. The share of US equities is an incredible 70%. There can therefore hardly be any talk of a world index. It is also argued that the high weighting does not reflect the actual economic performance of the individual countries in the world. For the USA, this amounts to just 15% of global GDP. However, the high weighting is initially the result of the strong performance of recent years. The stock market value determines the share in the index. If a share rises particularly strongly and thus becomes more valuable, it automatically takes up a higher proportion of the index. This simple type of weighting can be found in many indices. It is therefore also clear that it is a self-correcting principle in which the weakness of such shares also leads to a lower weighting over time.
To understand whether this high weighting is good or bad, you can look at what happens when you change the weighting. One way is to look at the S&P500 and the Nasdaq100. Both "eliminate" all non-US stocks compared to the MSCI World. In the S&P500 the share of the above 7 stocks is 25%, in the Nasdaq100 even 40%.
Looking at the performance, it quickly becomes clear that the high weighting has had a rather positive effect:
This can be even directly measured as the relative performance of the MSCI World without US stocks vs. the S&P500. This clearly shows that roughly since 2010, US stocks have driven the overall performance of the MSCI World.
The mentioned 7 stocks have achieved above-average returns in recent years and have done so again last year. It is now a mistake to extrapolate this development linearly into the future. However, it is also clear that a blanket statement that the higher weighting is a problem is wrong. This also applies over a longer period of time. Since its launch, the Nasdaq100 has achieved a return of 13000%, while the S&P500 has achieved 2500% over the same period. Other indices such as the MSCI China or the Dax price index have achieved 1-3% per year since inception. This makes it clear that the return prospects and risk have only a limited relationship to the weighting or risk diversification of the companies within the index. Much more important are the quality and growth prospects of the companies represented in the index, and these are also estimated to be higher for the USA than for the eurozone in the coming years.
Ok, so would you rather buy the Nasdaq100 than the MSCI World? Well, it's not quite that simple. Although the probability is very low that the Nasdaq100 will collapse completely in the next few years and the Dax, for example, will shoot through the roof. No, what makes the whole thing so complex is that the investment horizon and capital invested differ from investor to investor. Here is an example. Let's take two portfolios that increase by around 3% annually over 5 years. What differs is the sequence of returns over the years, as the annual performance in this example fluctuates between -28% and +36%. In portfolio A, the strongest years are right at the beginning, in portfolio B the weakest. With a one-off investment (here €5,000), this does not matter because both portfolios are worth the same in the end. It only gets exciting if you don't invest all the money at once, but rather smaller amounts over and over again, as is probably the case for most private investors (here: start with €2000 and deposit €1000 in each of the first 3 years). Portfolio B benefits greatly from the late high gains, while Portfolio A in the savings variant accumulates more losses and is worth less than €5000 on balance, even though the index has risen by more than 3% per year on average. In one case the real return is worse than the comparison, in the other case it is better.
What this example is meant to illustrate is that you can outperform or underperform an index simply by continuously buying that index at different times.
What can we learn from all this? A high weighting of individual stocks in the MSCI World is no reason for it to be a bad index. And even if this cluster risk causes the MSCI World to fall more sharply than a Europe or China index in the future, it does not mean that you will directly achieve a poorer return. Individual saving behavior and investment horizon are more important. The MSCI World offers a simple and uncomplicated entry into the stock market. It is much more important to do this than to be unsettled by articles, and most alternatives are more complex, more expensive and have so far failed to prove that they really bring an advantage in the long term.
The MSCI World is therefore a good investment and for sure not the worst. If you have it, you may stick with it, even if it might underperform other benchmarks during the incoming years. Cause one can only know the best investment in retrospect.