I often get confused when people here argue whether one could beat "the market". Which "market" are they referring to? Assuming Equities, which equities and index? MSCI World? S&P500? FTSE100? ASX200? Emerging markets?Many portfolios suggested here seem to suggest a strong U.S. bias for equities, and even an MSCI world would have almost 40% U.S. equity exposure. While it's true that the S&P500 has had strong past returns over many time periods, there's plenty of research suggesting that over the same periods other markets have outperformed.Let's assume for a minute that "the market" is the S&P500 (or MSCI world index, irrelevant for my point). In times of low-cost ETFs widely available and being able to shift the weightings of one's portfolio relatively easily to replicate a strategy, I think it makes sense to compare this reference index and their risk adjusted returns to other indices along different dimensions. For equities, the obvious ones are
- Geographic focus Comparing reference indices in different countries can be an interesting exercise. Quite surprisingly, the Australian, South African, and Swedish stock market have had higher risk adjusted returns over different periods (16 years, 40 years, 116 years) than the S&P500. https://engineeredportfolio.com/2017/07/30/which-country-has-the-best-stock-market/ One might also look into historic performance of emerging markets vs. U.S, Europe or OECD.
- Company size There's plenty of research suggesting that small caps, at least in certain geographies, have historically outperformed large cap over long periods of time. https://engineeredportfolio.com/2017/05/13/emerging-market-and-small-cap-outperformance-historical-comparison-of-international-equities/
- Company type Over the past decade, 'growth' stocks have outperformed 'value'-stocks in the U.S. and other markets.
- Sector focus Similarly, if one had put more emphasis on tech (e.g. NASDAQ) and placed their bet on buying QQQ, returns would have significantly higher since the past bull run.
Now obviously past performance does not predict future returns, but it's one data point and can be considered alongside other factors. These include current valuations of such markets or sectors (particularly when it comes to investing lump sums at a certain point of time) and more importantly larger themes such as changes in political landscapes and the geopolitical environment, climate change and shift towards renewables, urbanization (or de-urbanization due to COVID?), digitization, etc.With a lot of data on past performance of different indices available and reflecting on major socioeconomic and political trends that will shape our lives in the next decades, I'd be interested in creating a diversified portfolio using low-cost ETFs, which over the next 20-30 years is likely to outperform the classic bogleheads 3-fund portfolio or an MSCI world and potentially offer higher risk-adjusted returns compared to those indices. Suggestions should be evidence-based on a combination of past returns and outlook into the future, rather than saying "just put your money into FANG or an AI or ROBO-ETF".With that in mind, which mix of markets, or sectors, do you see outperforming over the next decades compared to a S&P500 or MSCI world reference index, how would you build a low-cost portfolio based on that strategy, and with which weightings? Let's discuss!