"MSCI World versus global portfolio: Why an index is rarely enough"

Many investors consider the MSCI World to be an all-purpose solution for investing money. One ETF, one click, and your global portfolio is complete—that's the common narrative. But it's not that simple. In the past, the index return has not been brilliant over various investment periods. Are there simple and better diversified alternatives? Ali Masarwah explores these questions. He is a fund analyst and managing director of the financial services provider envestor.

1 December 2025. FRANKFURT (envestor). The MSCI World is the second most popular index in Europe after the S&P 500 for constructing ETFs. Its long-term performance is indeed impressive. To put it bluntly: a hypothetical investment of €10,000 at the end of 1969 would have grown to just under €727,000 by the end of November 2025 – an increase of over 7,170 percent. But what looks like the ultimate success story on paper does not correspond to reality. People do not invest in the same fund for 56 years, often not even for 40, 30, or 20 years. Investment biographies consist of stages: five-year periods are likely to occur more frequently than ten-year periods, especially with ETFs. When one-time investments are liquidated after a few years, there are often breaks, new products are discovered, savings plans are entered into, increased, reduced, or terminated. The reality of investing is therefore much more “messier” than a smooth long-term curve!

To make this reality more tangible, it is useful to analyze rolling returns. Let's look at the many five- or ten-year periods since 1970. Two fictional investors illustrate the highly varied return results: Hans Maier and Silke Müller, both now 85 years old, repeatedly invest in global equities via a fictional MSCI World ETF, but with different holding periods. Costs are not taken into account.

Hans Maier tends to take a short-term view. He repeatedly invests in the MSCI World for five years, then exits, takes a break, or starts a new five-year cycle. In the worst five-year period, between February 1973 and January 1978, the index lost an average of 9.1 percent per year as a result of the oil crisis and high inflation – a disaster, especially after adjusting for inflation! In the best five-year period, from May 1995 to April 2000, the MSCI World gained 27.9 percent annually. In between, there were other weak phases, such as the end of the 1980s with moderate losses, and strong ones, such as the early 1980s with returns above the 20 percent mark. Across all five-year periods since 1970, the range thus extends from around minus 9 to just under plus 28 percent per annum.

Silke Müller is more patient. She consistently holds her investments for ten years. Her results are significantly smoother, but by no means free of disappointments. In the 1970s, she achieved a return of just under 1 percent per year in individual ten-year periods – in real terms, i.e., after inflation, a loss-making business. Between 1999 and 2009, i.e., from the dot-com bubble to the end of the financial crisis, the MSCI World lost an average of 4.2 percent per year over a ten-year period. This contrasts with very strong phases, such as between December 1979 and November 1989, with around 19 percent per year, or in the decade between October 2011 and September 2021, with returns of around 14 percent per year.

The comparison shows that longer holding periods smooth out the ups and downs, but they do not eliminate the risk of significant losses. Anyone buying an ETF on the MSCI World today has no guarantee as to whether the next ten years will resemble 1999–2009 or 2011–2021. And it is certainly not possible to derive a reliable individual investor experience from a 56-year backtest curve.

This raises the question of whether the MSCI World is actually the best benchmark – or whether the risk/return profile can be improved with other constructs. An obvious approach is a “real” global portfolio that equally weights the major regions. A simple global portfolio consists of four components: one ETF each on the S&P 500, the MSCI Europe, the Japanese Topix, and the MSCI Emerging Markets, all weighted at 25 percent. This significantly reduces the US share, and emerging markets are also included from the outset.

A second approach—let's call it global portfolio plus—expands this structure to include small caps: small caps from emerging markets and smaller companies from the US and Europe. The idea behind this is that small caps have often achieved higher returns than blue chips over the long term, albeit with greater volatility. In both cases, the aim is to spread the sources of return more widely across regions and company sizes, rather than relying on a single, heavily US-dominated index.

Because the shared history of these indices only began in the mid-1990s, the comparison with the MSCI World can be made using rolling ten-year periods from 1995 onwards. The result is clear. Those who invested in the simple, equally weighted global portfolio for ten years achieved higher returns than with an MSCI World investment in most cases for start years between 1995 and 2002. The picture is even clearer for the global portfolio plus: ten-year investments starting between 1995 and early 2009 consistently delivered better results than an MSCI World ETF. Only for start years between 2009 and 2015, i.e., in the phase after the financial crisis, when US tech stocks dominated the market, did the MSCI World come out ahead. It is precisely this phase that is being raved about and that is responsible for the many uncritical comments about the MSCI World.

In summary, this means that in 14 out of 20 possible starting years between 1995 and 2015, a broader global portfolio – especially the variant with an additional small-cap component – would have been the superior choice. The clear outperformance of US blue chips since the financial crisis thus proves to be more of a peculiarity of a particular market regime than a timeless law.

Investors can draw several conclusions from this. First, the historical long-term curve of the MSCI World is not a realistic reflection of typical investment careers. Anyone planning for a five- or ten-year horizon must expect a very wide range of possible outcomes, including phases with negative real returns. Second, broader diversification across regions and company sizes has historically led to better results than focusing on a single index across many starting points. Third, precisely because no one knows which region will dominate the next decade, it is risky to base your entire strategy on a market segment that has performed well in the past but has since become quite expensive.

Those who recognize that the future winners are not yet certain will spread their risk across a truly global portfolio – and thus make themselves less dependent on a single region whose success story is largely shaped by an exceptional US tech cycle. In upturns, diversification is a nuisance for investors. When the market is down, however, broad diversification proves to be a most welcome safeguard.

By Ali Masarwah, 1 December 2025, © envestor.de