The Best Stock Market For Index Investing Is…
Whether you’re learning to invest in the stock market or you’re a Warren Buffet level investor, you’ve probably come across the old saying that “no one beats the market”. However, all the wise men and women regurgitating this saying have never sat down over tea and discussed which market we can’t beat. Or perhaps a better question: which market beats the others?
In this article, we will be using our free Index Investing Returns Calculator to simulate investing with index funds that track the 12 available stock market indexes available through the investment calculator. This includes the Dow Jones, S&P 500, NASDAQ, CAC 40, FTSE 250, DAX, KOSPI, Nikkei 225, S&P/TSX Composite, All Ordinaries, Bovespa, and the Hang Seng. These simulations will be run over 40-year, 20-year, and 10-year periods from as early as 1943 to the current year as of writing this article—2021. Furthermore, simulations will be run 20-year and 1-year periods leading up to the low points of the major stock market crashes of 1987, the early 2000s, 2008, and the latest COVID-19 induced crash of 2020.
Let's start things off with defining some terms used throughout this article.
What is Index Fund Investing? Why Invest Indiscriminately?
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Index investing or index fund investing is an investing strategy that hinges on the following truth: that it is near impossible to consistently beat the stock market’s returns (especially if you hope to have a full-time job of your own). This idea has been developed by simply observing that mutual fund managers, some of the most educated individuals when it comes to investing, will have a few years where they successfully beat the stock market and far more where they do not.
To visualize this, imagine that the Dow Jones has risen 15% from 2020 to 2021. If you invested in a mutual fund that only returned you 10% on your investment, and then charged you a fee for managing your money, you’d be pretty upset, right? To solve this dilemma, many companies have begun offering "index funds” that allow investors to simply invest in the stocks that are a part of the stock market index (there are also ETFs that do the same thing). Different indices are followed by different mutual funds and management fees are usually kept lower than they otherwise would be. - Indiscriminately investing in an index is a self-coined term which means that no matter if the market goes up, down, or sideways, you consistently invest into the market. The benefit of doing such a thing is to avoid trying to time the market, which can be a highly tricky thing to do with any consistency. The Index Investing Returns Calculator allows you to attempt to beat the indiscriminate investor and showcases how painfully difficult it can be.
Delving Into the Data: The Best Indices to Invest In Over 40-year Simulation Periods
With regards to index investing, 40 years is a range to specifically pay attention to as it is more or less the working life of the average individual. Accordingly, several 40-year periods were tested using our investment calculator. These periods ran from May 1st of the beginning year to May 1st of the ending year and included 1981-2021, 1971-2011, 1961-2001, and 1951-1991. The results are shown below by index and time period, with the charts of the top five earning indices between 1981-2021.
| Period: | 1981-2021 | 1971-2011 | 1961-2001 | 1951-1991 | 1943-1981 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Index Name | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank |
| NASDAQ | 1653% | 1 | 894% | 1 | 1568% | 1 | 822% | 1 | 787% | 1 |
| Dow Jones | 771% | 2 | 584% | 2 | 796% | 3 | 314% | 3 | 160% | 3 |
| S&P 500 | 739% | 3 | 502% | 4 | 820% | 2 | 428% | 2 | 277% | 2 |
| DAX | 568% | 4 | 583% | 3 | - | - | - | - | - | - |
| KOSPI | 542% | 5 | - | - | - | - | - | - | - | - |
| Hang Seng | 507% | 6 | - | - | - | - | - | - | - | - |
| All Ordinaries | 262% | 7 | - | - | - | - | - | - | - | - |
| S&P/TSX | 253% | 8 | - | - | - | - | - | - | - | - |
| CAC 40 | 252% | 9 | 467% | 5 | - | - | - | - | - | - |
| Nikkei 225 | 102% | 10 | 6% | 6 | 292% | 4 | - | - | - | - |
While you can slice and dice these 40-year periods in many other ways—and I highly encourage you to attempt to do so—one index has historically consistently beat the others by a healthy margin: the NASDAQ. Furthermore, I’d like to point out that the American stock markets have had a significant advantage relative to other stock markets globally, with only the DAX, Hang Seng, and KOSPI coming close over the past 40 years. Now I could wrap up the article here and say, everyone go invest in the NASDAQ, but unfortunately (and fortunate for you) I’m too meticulous of an individual to come to such a hasty conclusion. Let's take a look at some simulations of 20-year periods.
| Period: | 2001-2021 | 1981-2001 | 1961-1981 | 1943-1961 | ||||
|---|---|---|---|---|---|---|---|---|
| Index Name | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank |
| NASDAQ | 399% | 1 | 366% | 4 | 187% | 2 | 170% | 3 |
| Bovespa | 234% | 2 | - | - | - | - | - | - |
| S&P 500 | 188% | 3 | 320% | 6 | 49% | 3 | 200% | 1 |
| Dow Jones | 158% | 4 | 376% | 3 | 20% | 4 | 175% | 2 |
| DAX | 134% | 5 | 336% | 5 | - | - | - | - |
| KOSPI | 128% | 6 | - | - | - | - | - | - |
| FTSE 250 | 125% | 7 | - | - | - | - | - | - |
| Nikkei 225 | 120% | 8 | -7% | 7 | 253% | 1 | - | - |
| S&P/TSX | 66% | 9 | - | - | - | - | - | - |
| Hang Seng | 57% | 10 (tie) | 391% | 2 | - | - | - | - |
| All Ordinaries | 57% | 10 (tie) | - | - | - | - | - | - |
| CAC 40 | 50% | 11 | 403% | 1 | - | - | - | - |
Now I know what you may be thinking, the NASDAQ only ranks as the best index in one of the four 20-year time periods observed, how can it be the best ranking index over all the 40-year periods? Upon deeper examination of the data, we can see the NASDAQ has been historically highly resilient. While other indexes had very strong 20-year stretches, sometimes topping the NASDAQ, they usually have far lower lows.
Notice how the CAC led all indices over the 1981-2001 stretch returning the indiscriminate investor a whopping 403%, but unfortunately lost steam over the 2001-2021 stretch returning a measly 50%. Or how the Nikkei returned the indiscriminate investor 253% over the 1961-1981 stretch, but followed it up with -7% and 120% for 1981-2001 and 2001-2021, respectively. Same can be said for the Hang Seng falling from the 2nd highest returning index 1981-2001 all the way down to the 10th in 2001-2021. The only compatible indices to the NASDAQ in terms of consistency are the S&P 500 and Dow Jones, but when either of these indices provided a higher return to the index investor, the NASDAQ wasn’t too far behind. On the other hand, when the NASDAQ outperformed these indices, it did by a significant margin.
Below we break down the 1981-2021 time period into four 10-year time periods.
| Period: | 2011-2021 | 2001-2011 | 1991-2001 | 1981-1991 | ||||
|---|---|---|---|---|---|---|---|---|
| Index Name | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank |
| NASDAQ | 189% | 1 | 45% | 6 | 112% | 4 | 61% | 7 |
| FTSE 250 | 169% | 2 | 88% | 3 | 23% | 8 | - | - |
| S&P 500 | 105% | 3 | 21% | 8 | 100% | 5 | 92% | 4 |
| Bovespa | 87% | 4 | 168% | 1 | - | - | - | - |
| Dow Jones | 85% | 5 | 25% | 6 | 114% | 3 | 98% | 3 |
| Nikkei 225 | 83% | 6 | -12% | 10 | -19% | 11 | 89% | 5 |
| DAX | 55% | 7 | 55% | 5 | 137% | 1 | 74% | 6 |
| KOSPI | 51% | 8 | 112% | 2 (tie) | -14% | 10 | - | - |
| CAC 40 | 41% | 9 | 112% | 2 (tie) | -14% | 9 | 146% | 1 |
| All Ordinaries | 34% | 10 | 21% | 8 | 50% | 8 | - | - |
| S&P/TSX | 33% | 11 | 45% | 6 | 58% | 6 | - | - |
| Hang Seng | 20% | 12 | 60% | 4 | 55% | 7 | 124% | 2 |
Similarly to the 20 year breakdown, we can see that the NASDAQ has only ranked in the first place in one out of the four decades observed. However, it had consistently earned the indiscriminate index fund investor a positive return and is never too far behind its American peers. Foreign markets often had strong decades followed or preceded by relatively weak decades. Examples include the CAC returning the indiscriminate index investor 146% during 1981-1991 compared to -14% during 1991-2001 or the DAX returning 137% during the 1991-2001 decade while not returning more than 74% for any of the other three decades observed.
Is the Nasdaq More Vulnerable to Bear Markets?
Frequently in the investing world, higher returns are plagued with lower lows. Below we examine returns for the indiscriminate index investor over four major recessions in the past 40 years—the 1987, the early 2000s, the 2008, and the 2020 market crashes. We observe performance in these recessions in two manners, looking at the indiscriminate index investor’s performance in the 20 years leading to the lowest point of the recession as well as the indiscriminate index investor’s performance throughout the year leading up to the recession.
| Period: | 2000-2020 | 1988-2008 | 1982-2002 | 1967-1987 | 2019-2020 | 2007-2008 | 2001-2002 | 1986-1987 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Index Name | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank | Return % | Rank |
| NASDAQ | 155% | 1 | 63% | 2 (tie) | 106% | 4 | 187% | 2 | -16% | 2 | -30% | 3 (tie) | -28% | 9 | -19% | 6 |
| Bovespa | 109% | 2 | - | - | - | - | - | - | -33% | 9 | -39% | 8 | -20% | 6 | - | - |
| S&P 500 | 64% | 3 | 35% | 6 | 122% | 3 | 100% | 4 | -22% | 3 | -32% | 4 (tie) | -22% | 7 | -10% | 3 (tie) |
| Dow Jones | 52% | 4 | 58% | 5 | 172% | 2 | 83% | 5 | -27% | 7 (tie) | -30% | 3 (tie) | -19% | 5 | -10% | 3 (tie) |
| FTSE 250 | 43% | 5 | 59% | 4 | - | - | - | - | -30% | 8 | -29% | 2 (tie) | -23% | 8 | -15%* | 5* |
| DAX | 41% | 6 | 60% | 3 (tie) | 64% | 6 | 156% | 3 | -27% | 7 (tie) | -32% | 4 (tie) | -38% | 11 | -14% | 4 (tie) |
| Nikkei 225 | 28% | 7 (tie) | -47% | 8 | -44% | 7 | 528% | 1 | -23% | 4 | -38% | 7 | -13% | 2 | 6% | 2 |
| Hang Seng | 28% | 7 (tie) | 91% | 1 | 190% | 1 | - | - | -15% | 1 | -37% | 6 | -14% | 3 | -27% | 7 (tie) |
| KOSPI | 24% | 8 | 63% | 2 (tie) | - | - | - | - | -24% | 5 | -26% | 1 | -8% | 1 (tie) | 40% | 1 |
| All Ordinaries | 8% | 9 | 60% | 3 (tie) | - | - | - | - | -26% | 6 (tie) | -29% | 2 (tie) | -8% | 1 (tie) | -24% | 8 (tie) |
| S&P/TSX | 6% | 10 | 60% | 3 (tie) | - | - | - | - | -27% | 1 (tie) | -32% | 4 (tie) | -17% | 4 | -14% | 4 (tie) |
| CAC 40 | -3% | 11 | 15% | 7 | 92% | 5 | - | - | -26% | 6 (tie) | -33% | 5 | -30% | 10 | -23% | 7 (tie) |
Looking at the performances of the different indices through these recessions reveals two major takeaways. For starters, when a recession is taking place, all markets are nearly equally affected and no market is consistently the best choice during a global recession.
One exception was the KOSPI, which ranked 1st the year leading up to three of the four major recessions and even earned the indiscriminate index fund investor a 40% return over the year leading to the 1987 recession. However, over the 20-year periods leading up to the 2020 recession, the KOSPI ranked 8th in return. It tied the NASDAQ for second in the 20 years leading up to the 2008 recession. While the NASDAQ was relatively more affected by recessions than the KOSPI, for example, it earned the indiscriminate index fund investor a below average return in only two of the four 1-year periods leading up to the four major recessions observed. More importantly, the NASDAQ returned an above average return in all 20-year periods leading up to each market decline analyzed.
Summary and Conclusion
Now I want to preface the following statement with a note of caution: the past isn’t always a crystal ball into the future, but it may help shed some light on trends to guide future decision making. As displayed by our wonderful index fund investment return calculator, the NASDAQ has consistently outpaced other indices over the long-term 40-year periods observed. Over the decade-long periods observed, the NASDAQ doesn’t always provide the highest return to the indiscriminate index fund investor. However, it never fell too far behind pace, and over 20-year periods it recovered from any stagnation quite well and provided near or above average return to the index investor. Despite these higher returns, the NASDAQ isn’t far more susceptible to downturns when compared to its peers and often performs better in the 20-year periods leading up to recessions.
I highly encourage you to play with our free investing calculator here to test out different investment strategies over different time periods in different indices. Let us know what you think is the best index to invest in moving forward and happy StockScraping!
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Published: 5/27/2021
