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the msda world index is one of the major
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stock market indices in the world and
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arguably the most popular index among
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passive investors it is a widely
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recognized Benchmark for Global stock
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markets and composting stocks from 23
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different developed countries however
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despite its popularity and widespread
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use there are several misconceptions
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surrounding the msci index that can lead
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to misunderstanding its purpose and
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significance so in this video we will
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explore some of these misconceptions 5
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and total and provide Clarity on what
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the msda world index actually is how it
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works and what its limitations are so
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whether you are an experienced investor
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or simply interested in learning more
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about global Equity markets this video
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will provide some very valuable insights
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into the msci world index and its role
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in the world of Finance
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thank you
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[Applause]
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first off let me get one thing straight
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think the vast majority of people should
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simply invest passively and invest in
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one two or three Broad and low cost
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indices and I think the MSA world is a
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really good choice for this if you are
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completely new to investing investing in
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a passive ETF is also an excellent
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choice to get a sense of what it's
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actually like to be invested in the
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equity markets how it feels like when
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the value of your Investments goes up
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and down and to develop an interest in
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the broader economy and more generally
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economic topics however I think
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especially among the group of passive
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investors there are a lot of
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misconceptions about the msci world
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index so let me inform you about some of
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the limitations of this popular ETF so
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that you can make more informed
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decisions when it comes to choosing the
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appropriate investing strategy and goals
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that suit your personal situation so the
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first one is the idea that the msda
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world carries no risk which is simply
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not true what you have to understand is
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that the passive investing industry is
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now a trillion dollar industry and
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obviously this industry will make lots
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of promises to attract even more money
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but these promises may not necessarily
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be true the nsca world is certainly not
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a magical investment instrument that
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will magically always go up now in fact
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it's not uncommon for the index to
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decline in any given year as highlighted
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by these two travel charts now take a
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guess what do you think how long lasted
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the longest drawdown of the msci world
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index I'm pretty sure you will be
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surprised by the length of this flat
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return period so let me show you well
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the longest drawdown period lasted for
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13 years and two months and was between
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August 2000 and October 2013 and the
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maximum drawdown from Peak to draw and
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this period was actually a negative 54
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this chart here attempts to answer how
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long you should stay invested to have a
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high probability of achieving a positive
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return for different period length it
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calculates how many periods of that
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length have resulted in positive return
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and as you can see you only cross the 90
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threshold if you extend your investing
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Horizon to 10 years or more so to sum up
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this first point please understand that
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the msca world index is not immune to
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Market fluctuations like all Investments
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the msca world index is subject to
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volatility and while the index has
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historically delivered very decent
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long-term returns it is still subject to
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short-term ups and downs and it's
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important to mentally prepare for this
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okay the second limitation of the MSA
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World index is a little more nuanced
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from my experience of talking to people
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who invest regularly in ETFs I can say
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that investing in a broad market index
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or multiple ETFs even makes many people
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feel comfortable and I would argue
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sometimes too comfortable take my fiance
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for instance three years ago or so she
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set up an ETF savings plan and now
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invests 300 Euros a month into the MSA
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World index I think that's actually a
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great start but consider during her
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monthly income 300 Euros in my opinion
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is not really that impressive when
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speaking of savings rates so as I said I
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feel like most people are getting too
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comfortable once they've set up one or
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two ETF savings plans they tell
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themselves that they are now doing
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something for their retirement but then
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they just stop they stop educating
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themselves and they never consider
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investing more money larger and more
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significant sums of money that will
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actually get them closer to reaching
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Financial Freedom and quite frankly as
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they are not educating themselves not
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really understanding what they actually
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invest in how their stock market works
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and so on and so forth they would also
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never feel comfortable actually putting
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a hundred thousand dollars or more into
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the stock market and this brings us to
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my third problem with the MSA World
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index the idea that the msci world index
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is an appropriate index for all
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investors another promise of the ETF
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industry is that you simply have to
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invest for 30 years and you will become
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rich but as we've just shown first the
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msci world does not always go up and
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will actually experience multi-year flat
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return periods too and second of all
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investing just 50 or 100 a month will
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not lead to Financial Freedom sorry but
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I have to tell you that of course
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investing a hundred dollars a month for
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30 years straight will multiply your
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wealth after 30 years your net worth
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will have grown to 149
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000 US Dollars and that's obviously
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great but I have to break it to you 150
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Grand will not allow you to live a
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financially free life especially when
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you start taking into account inflation
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so you only get financially free if you
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actually work very hard invest a lot of
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money regularly over the long term try
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to increase your income and possibly
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achieve a return greater than eight
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percent annually fourthly there is no
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such thing as passive investing in fact
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all investing requires active decisions
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this is something that I have addressed
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in a previous video of mine titled the
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big index and ETF lie so first of all
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many ETFs are actually anything but
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passive and I think the average investor
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is not really aware of this there are a
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lot of very active portfolio management
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decisions involved in most ETFs and
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certain stocks may be added to or
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deleted from an index on a regular basis
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on top of this by investing in the msci
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world index you yourself also make a
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very active decision you make the
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decision to get exposure to a the
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developed markets and especially the
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United States as contrary to popular
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belief the msda world index does not
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give you exposure to Global Equity
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markets and all countries around the
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world now in fact close to 68 of the
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index is made up of U.S listed companies
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and B you get a lot of exposure to large
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cap stocks just look at the current top
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10 constituents of the msci world index
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that represent 18 of the index they are
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all companies with the market
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capitalization well north of 100 billion
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US dollars so you cannot really say that
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investing in the msca world index
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guarantees absolute diversification now
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investing in the msai world does provide
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some level of diversification but it
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does not guarantee it as seen the index
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is heavily weighted towards the largest
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companies in the United States lastly
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with over 1 500 large and mid-cap
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companies from 23 different developed
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countries the index may be a great
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choice from a diversification point of
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view but it may also result in an
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unintended exposure to lower quality
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businesses if you've watched my recent
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video titled the one thing most people
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get wrong about stocks you will know
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that the returns of the individual
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components of a broad stock market index
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are positively skewed meaning that only
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a select few stocks actually contribute
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meaningfully to the total return of the
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index as Hendrick bazenbinder
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highlighted in his paper do stocks
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outperform treasury bills quote unquote
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the best performing four percent of
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listed companies explain the net gain of
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the entire U.S stock market since 1926.
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so what I love about investing actively
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is that it gives me control over which
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companies I actually invest in I only
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want to invest in businesses earning
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High Returns on Capital with healthy
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balance sheets so that they can
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self-fund the operations businesses with
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a long run rate for growth and with
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excellent Capital allocators at the
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helmet of the corporation now combine
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this with above average revenue growth
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operating leverage and a modest starting
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valuation and you get excellent
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ingredients for an outperforming stock
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of course you can also run a dual
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strategy depending on your goals invest
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a certain percentage of your net worth
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passively in ETFs like the MSA World
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index and then devote the other part of
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your portfolio and net worth to
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individual stocks with sound and strong
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fundamentals okay I'm sure you would
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love to learn more about the positively
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skewed distribution of stock returns
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which I just mentioned very briefly I
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think understanding this is essential
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for both active and passive investors so
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make sure to watch the following video
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next take care
