[The data on global stock returns in this post were updated in January of 2022, where new data were available.]

Spurred by the popularity of the historical returns data presented here at Mindfully Investing, I’m continuing to evaluate additional historical return datasets.  For today’s post, I wanted to take a closer look at the history of global stock returns.

Making Sense of Global Stocks

Why consider stocks beyond the U.S.?  For those who don’t live in the U.S., this probably seems like a myopic question.  But consider that the U.S. makes up more than half (55%) of the world stock market capitalization as shown in this pie graph from Credit Suisse.

Foreign investors understandably seek out this big U.S. chunk of the world stock market resulting in foreign investment representing 40% of U.S. stocks.

But investing solely in U.S. stocks ignores the other half of the world’s stock markets.  And that means you’re ignoring an easy way to substantially diversify your stock portfolio.  While that’s not a recommendation to invest in world stocks, it’s a good reason to at least evaluate how non-U.S. stocks might fit into your long-term investment portfolio.

Mindful investors favor investing via mutual funds and exchange-traded funds (ETFs), rather than trying to pick individual stocks for reasons laid out here.  When you look at the world of stock funds you will often see funds described as being “ex-U.S.”  The most common example is “Developed-Markets Ex-U.S.”.  This simply means that the fund invests in developed markets all over the world except the U.S.

The way fund providers define a “developed market” can vary, but generally, they look at criteria such as a country’s: income per capita, per capita gross domestic product, level of industrialization, the standard of living, and level of technological infrastructure.  Countries that are less developed by these metrics are called “emerging markets”, and markets that are even less developed are called “frontier markets”.  Here’s a list from MSCI, a company that classifies the world’s stock markets.

This pie graph from investment firm BBH shows the relative sizes of the stock markets in the U.S., other developed markets, and emerging markets.  It also illustrates that China and India are the two largest emerging markets by far.

The 39% global market cap for the U.S. in this pie graph from BBH may seem to contradict the 55% in the first pie graph from Credit Suisse.  However, the first pie graph focuses mostly on developed markets (with the addition of China), while the pie second graph includes many additional emerging market countries.  Also, the second pie graph shows that, since 2003, the U.S. market capitalization has been shrinking relative to the rest of the world, which suggests even more reason to consider non-U.S. stocks.

Historical Returns by Country

Probably the best summary of global stock returns comes from an annual Credit Suisse report prepared by researchers Elroy Dimson, Paul Marsh, and Mike Staunton.  They tracked down historical data going back to 1900 for 23 countries including the U.S.  This graph shows the nominal (not inflation-adjusted) annualized returns (Compound Annual Growth Rate; CAGR) by country from 1900 to 2020 and compares it to the U.S., Europe, Emerging Markets, Developed Markets, and a World aggregate of all markets.

(All returns in the graph are in U.S. dollar terms, and I converted the study’s inflation-adjusted returns to nominal returns using a historical average of 3% annual inflation over this entire period.  Some values are estimated from charts in the report because Credit Suisse doesn’t publically release the raw data from the Dimson, Marsh, and Staunton study. )

The fact that U.S. stock returns beat every other country except Australia over 120 years is one reason that some expert investors like Warren Buffett and Jack Bogle avoid foreign stocks.  It’s enticing and easy to attribute America’s superb historical stock performance to the popular idea of American exceptionalism, which both Buffett and Bogle have sometimes mentioned.  “Nothing can stop America when you get right down to it. Never bet against America.”, Buffett has said.

But by this logic, doesn’t Australia’s superior performance indicate that it’s even more exceptional than the U.S.?  Wouldn’t a portfolio composed of 100% Australian stocks be even better?  I think not.  Further, a patriotic view of the U.S. stock market ignores huge events in the last 120 years that have shaped each countries long-term stock performance.  What if world wars had ground the U.S. economy to dust twice in 30 years as happened to Germany?  In that event, it’s unlikely that the U.S. would be near the top of this historical returns list or that the case for future American exceptionalism would seem so strong.

More detailed data are available for a shorter period going back to 1970 from the MSCI Developed Market country indices.  You may be interested in determining annualized returns between specific years for individual countries.  Similar to my historical return calculators for stocks, bonds, cash, alternative real estate, and corporate bonds, this calculator provides annualized stock returns (both nominal and inflation-adjusted) between any two dates based on 22 Developed Market countries using MSCI data.  Again, all returns are calculated on a U.S. dollar basis.  (Note that the data for some countries do not extend all the way back to 1970.  If you enter a date for a country without data for that year, you will get an error message of “-100%”)

Historical Returns of Developed Markets

While stock funds that specialize in individual countries are readily available and popular, a mindful view of global diversification suggests that it’s better to spread your bets across multiple countries.  One of the most common examples is “developed market” funds, which typically include all the countries from this category in the MSCI classification system.  What’s the historical performance of these baskets of developed market stocks?

The “developed market” value (gray bar) from the above bar graph provides a good estimate of nominal annualized returns for these stock markets since 1900.  Thus, we can say that the long-term return is:

• Developed Market stocks including the U.S. since 1900 – 8.4%.

However, if you’re like me, you already have some U.S. stock investments.  So, a developed market fund that excludes the U.S. is a more interesting comparison.  The MSCI Developed Market Index provides data going back to 1970, and it excludes the U.S.  The reported annualized nominal return over this much shorter timeframe was:

• Developed Market stocks excluding the U.S. since 1970 – 9.4%.

Given that two time periods are presented here, we can’t directly compare the including U.S.-statistic to the excluding-U.S. statistic.

Also, the 9.4% return for developed markets excluding the U.S. is a long-term average, which means that over shorter periods those stock returns diverged substantially from this central tendency.  This table shows some additional descriptive statistics for the nominal annual returns from developed-market stocks (excluding the U.S.) from 1970 through 2021.

Here’s another calculator that provides annualized Developed Market (excluding the U.S.) stock returns (both nominal and inflation-adjusted) between any two dates based on the MSCI Index data back to 1970 as well as Portfolio Visualizer data back to 1986.  I’ve provided both datasets for comparative purposes because they often provide slightly different annualized returns for the same period.  Again, take note that if you enter dates prior to 1986 for the Portfolio Visualizer option, you’ll get an error message that reads “-100%”.

Historical Returns of Emerging Markets

How about emerging market stocks?  The Credit Suisse study going back to 1900 only includes a couple of emerging market stocks.  Again, the MSCI Emerging Markets Index had the longest data set I could find for emerging market stocks, but it only goes back to 1988.  So, unlike the 120-year history of developed markets, we only have a meager 34-year history for emerging market stocks.  In this short timeframe the average annualized nominal return was:

• Emerging Market stocks since 1988 – 10.5%

Here are some additional descriptive statistics for emerging market stock returns from 1988 through 2021.

And here’s a calculator that will give you annualized nominal and inflation-adjusted returns for emerging-market stocks between any two years going back using both the MSCI Emerging Markets Index going back to 1988 and the Portfolio Visualizer data going back to 1995.  Again, take note that if you enter dates prior to 1995 for the Portfolio Visualizer option, you’ll get an error message that reads “-100%”.

Historical Risks for Global Stocks

Because higher returns are usually associated with higher risks of losing money, it’s prudent to evaluate the long-term balance of both returns and risks for every investment, including global stocks.  Volatility, as measured by the standard deviation of the routine ups and downs of returns over time, is the most common (but somewhat flawed) measure of investment risk.

Unfortunately, the Credit Suisse report going back to 1900 doesn’t provide much detailed volatility data by country or market classification.  However, they mention that for developed markets (including the U.S. plus China) the volatility (standard deviation) of inflation-adjusted returns since 1900 has been about 17.4%.

In my last post on corporate bonds, I gathered volatility and return data for a wide range of asset classes covering the last 20 years or so.  While it would be nice to use some of the longer stretches of volatility data available for some assets, using a consistent timeframe across all assets ensures that we aren’t including unusual economic events for some assets and ignoring them for others.

Looking across multiple reputable data sources, the most consistent period covering the widest range of asset classes I could find was from 2003 to 2019.  Seventeen years is not great, but it’s worth a look.  Here’s the graph plotting risk versus returns since 2003 for multiple asset classes.

The squares represent the actual nominal returns (CAGR) and risks (standard deviation) in this period, and the round dots represent the “theoretical”² or expected relationship between risk and returns for these asset classes.  The two dotted lines represent the best fit relationships for both the theoretical and actual data.

We’ve seen that U.S. stocks have often had higher returns than non-U.S. stocks.  Therefore, the theoretical assumptions about risk-return relationships would predict that U.S. stocks are more volatile than non-U.S. stocks.   Instead, in the last two decades or so developed-market (ex.-U.S.) and emerging market stocks have been more volatile than U.S. stocks while producing lower returns!

Conclusions

Both the last century and the last two decades of investing suggest that global stocks may offer a poor balance of risks and returns as compared to U.S. stocks.  The problem is that I can select another evaluation period and come up with an entirely different conclusion.  For example, here’s the risk-return information for the 10 years from 2000 to 2009:

This was one of the most devastating periods in U.S. stock market history, with massive crashes in 2000 and again in 2008/2009.  It was called the “lost decade” for U.S. investors.  And yet the risk-return relationship is exactly what you might expect; U.S. stocks had lower returns and lower volatility than global stocks.

Perhaps more importantly, the lost decade illustrates one of the clear advantages of diversification.  Emerging market stock returns absolutely crushed the lost decade.  While we might endure lower returns and higher risks for many years, there is the potential (and only the “potential” on any given day) that holding a geographic variety of stocks can help mitigate the impact of market turmoils as compared to less diversified portfolios.

I’ve argued that global stock diversification is a mindful way to invest, and I’ve presented some example portfolios that fit the bill.  But I’ve also said that stock diversification is no guarantee of better performance as compared to a less diversified approach like a U.S.-only portfolio.

While it may seem like I’m trying to sell the idea of a globally diversified stock portfolio, I wouldn’t go so far as to “recommend” it.  That’s because we can never predict the next decade of stock performance, or the future in general.  Just as we have to learn to live with many of life’s uncertainties, investors have to live with the uncertainty inherent to stock investing.  Consistent with the four cornerstones of mindful investing, you’ll have to wrestle with this uncertainty yourself and rationally decide the extent to which you want to globally diversify your stock holdings.

1 – The arithmetic average of annual returns differs from annualized returns (CAGR) as discussed more here.

2 – By “theoretical”, I mean that a quick review of any basic investing references shows that professionals assume a certain hierarchy of risks and returns among these asset classes based on historical data and experience.  Nonetheless, it’s widely understood that the actual hierarchy of risks or returns in any given period can vary substantially from this theoretical assumption.