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I'm new to learning about investing so this may sound stupid. But I'm from the UK and I looked up different index funds on the Vanguard UK website. And since its inception (in Jan 2010), the annual rate of return of the Vanguard Global Small-Cap Index is 14.06%. I understand that this index tracks smaller companies and hence their rate of growth is often higher than larger companies listed on the DOW, S&P 500, FTSE etc.

I guess my question is, this 14.06% average rate of return seems exceptionally high, I can't think why everybody in the world isn't investing into this? Are these high returns due to our economies rising back up from the 2008 crash? In other words is the next decade unlikely to bring similar rate of returns?

Thanks

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    Before you get too excited, note that the S&P 500 has an average total return of 14% since 1/1/2010. – D Stanley Sep 7 '18 at 13:24
  • Thanks for that info, I thought I read it was around 9.7%, but perhaps that was only over the past 10 years, Idk. Even so, why would that fact curb my excitement? If anything it's great to know that fact? – Primebrook Sep 7 '18 at 13:33
  • I imagine @DStanley is referring to the fact that, if you can get 14% in a reasonably large cap fund (which if nothing else is likely to be far less volatile), then another 0.06% (or 0.56% if we're generous with rounding) in a small cap fund probably isn't worth the likely increased volatility. – a CVn Sep 7 '18 at 13:51
  • Small cap and mid cap funds generate good returns; but those are too volatile. – Aastik Sep 7 '18 at 18:02
  • Expect (virtually) no correlation between what it did in the last eight years and what it will do in the next eight years. It's definitely not because it did 14% over eight years that it will do the same over the next eight years. It could lose an annualised 10% for all we know. – Pertinax Sep 14 '18 at 14:47
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Welcome to this site and the area of investing. The question you are asking, believe it or not, is behaviorally based not mathematically. Would this fund still be a good deal if you got a 10% average return? Yea, very much so in the current interest rate environment.

Now the obvious point is that many people, such as myself, cannot purchase this fund as I am not authorized to trade in the UK. No biggie, there are similar funds here in the US that offer similar rates of return.

So why don't people put all their money into this fund? Well some years stock funds have bad years and significant value can be lost. If you were forced to sell at that point, then you would lock in your losses. However, what happens, is that over time people recover and are rewarded with gains that average pretty high. So for money that you might need in the short term, it should be in something stable, boring, and that does not earn much.

So why don't people put all extra money in this fund. Imagine two people one puts all their discretionary income into stock funds, the other spends all his money on cars and clothes. Who "looks" richer? The second person. The first person probably is not much better as they probably have a miserable life, but over time will have a whole lot of money. It takes time to get there, and sometimes it is tough to stick with the program when your fund is down 25% over the last three months.

This fund, and ones like it, is a facet of wealth building. One must save some, give some, and spend some to properly build wealth. Of the savings some needs to be in a simple and boring savings account, and some needs to go into accounts much like the one in question. However, it is easy to focus on too much of one facet so we must strive to have a balanced life.

  • Thanks for such a complete answer. What you said at the end about this being one facet of wealth building and how we must strive for balance was particularly interesting. What is the best balance? What resources do you know of either books/lectures/YT videos that explain this particular part of personal finance, namely, the part that tells you how to best "diversify" your wealth building process. Thanks. – Primebrook Sep 7 '18 at 14:51
  • It is difficult to find a comprehensive resource and only a small portion of financial authors including giving in their wealth building plan, but in my experience it is vital. – Pete B. Sep 7 '18 at 14:57
  • Giving? That seems counter intuitive? The only way that seems to make sense is because it is beneficial if done on a macro-scale, i.e. reduces inequality/increases social/economic mobility which in turn means greater gains for us in the long run. If that's not what you mean, I'm curious as to why you say giving is an essential part of wealth building for the individual? – Primebrook Sep 7 '18 at 15:09
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    It does seem counter intuitive, but it is essential. Wealth building is more about behavior than math. Giving helps a person behave better which allows them to build more wealth. That is it in a nutshell. – Pete B. Sep 7 '18 at 16:16
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    @Primebrook yes. There is a collection of studies in a book called The Paradox of Generosity. Its a bit dry, but very interesting. – Pete B. Sep 17 '18 at 11:11
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I guess my question is, this 14.06% average rate of return seems exceptionally high, I can't think why everybody in the world isn't investing into this?

So the more general question of "why doesn't everyone invest in the market" is answered by Pete B. But for this specific fund:

There are many reasons, but the big ones are:

  1. Past performance is not an indicator of future performance. If it was, everyone would look at whatever had the highest rate of return that year and invest in that, obviously.

  2. The last 8 (almost 9, as of 9/2018) years have been an extended bull market. Looking at returns from only the last 8 years will show that stocks are great and everything else is bad. This will be true right up until it is not.

  3. The S&P 500 return (reinvesting dividends) for the last 8 years is 14.945%, exceeding those of the fund; in other words, it's returns are not exceptional given the bull market.

Are these high returns due to our economies rising back up from the 2008 crash? In other words is the next decade unlikely to bring similar rate of returns?

The high point from before the 2008 crash (in 2007) was not reached again until 2013. So that 6 year span was simply rebuilding. Since 2013 it has almost doubled in value, which is very high and not really readily assignable to a single cause.

Will the next decade bring similar rates of return? Maybe. Maybe not. Historically the S&P 500 has averaged 9.2% returns. We are high, high above that over the last 8 years. Barring the world becoming a utopia, at some point there will be a crash; however, when that crash occurs, no one knows. It could be tomorrow, it could be next year, it could be ten years from now. In 2015 there was certainly a lot of belief that it would've happened by now, and yet it hasn't.

  • Past performance absolutely is an indicator of future performance. Not a guarantee, and you'll get more information if you consider how the performance is aligned with market cycles than if you take it out of context, but past performance is very very informative. – Ben Voigt Sep 17 '18 at 0:21

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