Historical Returns of the Market Portfolio

by on June 15, 2017 at 12:56 pm in Data Source, Economics, History | Permalink

A new paper by Ronald Q. Doeswijk, Trevin Lam, and Laurentius (Laurens) Adrianus Petrus Swinkels addresses exactly this question:

Using a newly constructed unique dataset, this study is the first to document returns of the market portfolio for a long period and with a high level of detail. Our market portfolio basically contains all assets in which financial investors have invested. We analyze nominal, real, and excess return and risk characteristics of this global multi-asset market portfolio and the asset categories over the period 1960 to 2015. The global market portfolio realizes a compounded real return of 4.38% with a standard deviation of 11.6% from 1960 until 2015. In the inflationary period from 1960 to 1979, the compounded real return of the GMP is 2.27%, while this is 5.57% in the disinflationary period from 1980 to 2015. The reward for the average investor is a compounded return of 3.24%-points above the saver’s. We also compare the performance of an investor who holds the market portfolio with an investor who uses simple heuristics for the portfolio allocation. Our results suggest that the market portfolio is close to the mean-variance frontier, but our heuristic allocations achieve a significantly higher reward for risk.

Do note that is for many countries, not just the United States.  For the pointer I thank Samir Varma.

1 Gabe Athouse June 15, 2017 at 1:04 pm

Well that’s completely useless information. We have All World indices, why would anyone care what the return on the basket all tradable assets is? Another ridiculous benchmark so that libtards can bash hedge funds for “not beating the market”? As if 99% of them understand what a benchmark is and why it’s so difficult to beat.


2 msgkings June 15, 2017 at 1:14 pm

Wait, beating the index is a liberal thing?


3 Moo cow June 15, 2017 at 7:32 pm

Haven’t you heard? Index investing is communist.

In a note titled “The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism,” a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

“A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management,”


4 David June 15, 2017 at 1:17 pm

Gabe, can you explain yourself (without the flamboyance)? Specifically, why is the All World index important, while a tradable basket not? Why is it difficult to beat a benchmark (such as the S&P500)?


5 Gabe Atthouse June 15, 2017 at 3:17 pm

msgkings: It’s a liberal thing to lambaste hedge funds for not adding value by pointing out that they don’t beat their benchmarks, but I think 99% of the critics don’t understand what a benchmark really is.

David: Because you asked nicely, no flamboyance. First of all, benchmarks are hard to beat because the assets that compose them have similar characteristics to the ETF/Hedge funds, but they aren’t real portfolios. For instance, when you look at the S&P every day, it isn’t a real portfolio, but some average of the prices (either based on market cap of stock price, I can’t remember) of the 500 companies that the NYSE chooses. If I am using the S&P as my benchmark, I have to create a portfolio that matches the S&P 500. Sounds easy, right? There are a number of issues here. If I collect a basket of equities that maps to the composition of the S&P today, that basket will not match perfectly tomorrow, the same way your 401k goes out of balance because of different growth rates between your investments. So I would need to rebalance often, which is prohibitively expensive. So that brings up the issue of how to take a sample that’s representative of the S&P, which is not only difficult but subjective. Should you use a factor model, or a stratified sample by industry, or maybe by cap size? All of these techniques will lead to a tracking error. The main point is that the benchmark is chosen NOT TO BE BEATEN! If I choose the treasuries as my benchmark and invest in the S&P ETF, I would win every year, but that means I chose a stupid benchmark.

The reason an All World index is useful (not important) is because people may want to see weighted growth rates across the globe. My point was that the All World (actually called All Country MSCI) exists, so this paper is useless.


6 Ray Lopez June 15, 2017 at 4:09 pm

@Gabe Atthouse – sounds like you work for the house (financial planner), pushing load funds. In fact, it turns out, regarding your ‘rebalancing’ point, for a global portfolio, “[for rebalanced portfolios vs non-rebalanced portfolios, over time] the returns are quite similar, and differ by less than 0.50% per year. ” Though 0.5%/yr is a lot, it’s likely to be greater than a ‘heuristic allocation’ for most people, who can’t match an index with their basket of stocks and constant churning, which only benefits stock brokers.

Bonus trivia: picking a basket of blue chip stocks, presently I like Macy’s, Ford, GE, Qualcom and gold (GLD), I have nearly matched the S&P500 for over the past 20 years, with an IRR of over 6%.


7 Mr Boglehead June 15, 2017 at 4:10 pm

LOL, you think the NYSE chooses the stocks in the S&P 500?

If you don’t even know who picks the S&P 500 then there’s no reason to believe the rest of your explanation – I mean its RIGHT THERE IN THE NAME!


8 msgkings June 15, 2017 at 4:31 pm

Good call, the rest of his “explanation” is also laughably false. Not to mention the still baffling claim that only “liberals” have a problem with poor hedge fund performance LOL

9 Gabe Atthouse June 15, 2017 at 5:30 pm

🙁 msgkings is like my foil. Aside from the ridiculous gaffe, how is my explanation “laughably false”? I’ve never seen you make a comment that has vestiges of intelligence. You post two line retorts and rely on what can only be considered a college bachelors degree in economics from some mid tiered private school. You didn’t make a single argument concerning my explanation.

10 msgkings June 15, 2017 at 5:41 pm

Sorry I rustled your jimmies, Gabe. Start with the S&P being a market cap weighted index so you don’t have to rebalance it every day and try to educate yourself from there. Still waiting for the explanation behind only liberals critiquing hedge fund underperformance.

11 Gabe Atthouse June 15, 2017 at 5:55 pm

It was an example you dope, how about the fact that a firm is replaced on the S&P every two weeks on average? And nice pull from The Original CC’s comment.

I’ll reiterate myself and spend some more time explaining the liberal obsession with financial institutions and how they paint anyone managing money as a criminal. Liberals are obsessed with the fact that people make money managing money, hence the weekly headline in the NYT/WaPo/LAT “CALPERS spends $XX Every Year on Hedge Fund Managers Didn’t Beat Their Benchmark in 20XX!”. It’s a combination of despising the fact that money managers exist with an ignorance of what it means to beat an index or the market or a benchmark. Also I didn’t so only liberals critique hedgefunds, and I can’t tell if you want an answer to your original question of this one, which bears little resemblance to the first one. Beating an index is not a liberal thing. Throwing out sweeping criticisms of financial services steeped in ignorance is. Your turn accounting major with a minor in economics or poly sci.

12 The Original CC June 15, 2017 at 4:34 pm

Gabe, as others pointed out, the NYSE does not pick the constituents or the weights of the S&P 500. More importantly, it is not difficult to track or nearly track the S&P 500. The Vanguard 500 fund and the etf SPY do it all the time. Your return will be very close to the return of the S&P 500’s return minus their small expense ratio.

Furthermore, while minor adjustments must be made to your portfolio, you do not need to constantly reweight and trade. Since the S&P 500 is market cap weighted, if the price of MSFT doubles, then both its weight in the index AND its weight in your portfolio double. No need to sell anything.

Finally, a lot of hedge funds (and perhaps most) are not benchmarked to the S&P 500. For instance, equity market neutral HFs ideally are market neutral, so comparing them to the S&P return is silly. The reason you constantly see these comparisons is b/c the journalists who report on HFs are clueless.


13 Gabe Atthouse June 15, 2017 at 5:36 pm

You’re obviously right about the S&P re the weighting scheme, but companies drop in and out, which requires rebalancing. The main point is that there are costs associated with tracking an index, whereas an index lives in a “frictionless” universe.

14 The Original CC June 15, 2017 at 9:58 pm

Gabe, you wrote: “You’re obviously right about the S&P re the weighting scheme, but companies drop in and out, which requires rebalancing. The main point is that there are costs associated with tracking an index, whereas an index lives in a “frictionless” universe.”

Nice try. There are costs, and yet somehow Vanguard’s 500 fund manages to trail the index by an amount very close to its (tiny) expense ratio.

It’s really not tough to track an index. It’s not even debatable; somebody out there is actually doing it year after year!

15 Dan Lavatan-Jeltz June 15, 2017 at 6:48 pm

It may be difficult to duplicate an index, but it is easy to beat one. In the case of the S&P all their returns come from about four stocks.

One obvious way to beat an index would be to start off with an index and then intentionally exclude the stocks that will obviously under-perform due to deteriorating fundamentals, poor management, and obvious overpricing.

But as you say, it can be tedious for large indexes, so it is probably simpler to find the 3% or so of assets that are radically mis-priced and then buy as much of them as you can.


16 Carlito Brigante June 15, 2017 at 9:30 pm

“One obvious way to beat an index would be to start off with an index and then intentionally exclude the stocks that will obviously under-perform due to deteriorating fundamentals, poor management, and obvious overpricing”

We currently see the FANG stocks driving the QQQQ and NDX higher. FANGs compose 42% of the NDX (NASDAQ 100) and13% of the S&P 500. Apple alone is 12% of the NDX and 4% of the S&P 500.

There should be price discovery opportunities for money managers to weed out overvalued stocks. But the move into ETFs and nonmanaged indexes has been massive. Net sales of mutual funds and ETFs recently have directed over two-thirds of inflows to passive index mutual funds and ETFs.

17 Brian Donohue June 16, 2017 at 7:31 am

“It may be difficult to duplicate an index, but it is easy to beat one.”

For a very few people, yes. In these cases, it is fair to wonder why such people would want to share their acumen with you.

For the vast majority of people, this is either a dangerous or lucrative illusion, depending on which side of the transaction you find yourself.

18 Brian Donohue June 15, 2017 at 1:53 pm

A good benchmark is basically a “little to no effort” return. If you invest assets for a living and can’t outperform a benchmark, you’re part of the problem.


19 Chris June 15, 2017 at 2:38 pm

I suspect you don’t know the difference between the all world *equity* indices and the all asset index. Either that or you don’t know the significance of the all asset portfolio in financial theory. Sounds like you know some people who know a bit about finance, maybe ask them.


20 Gabe Atthouse June 15, 2017 at 3:20 pm

I’m an actuary shit head, my pinky knows more about finance than you and your whole family. There is no benefit to an all asset index, what does it tell us that GDP growth doesn’t?


21 Mr Boglehead June 15, 2017 at 4:13 pm

LOL but you think the NYSE picks the S&P 500? Maybe your pinky is lying to you


22 Gabe Atthouse June 15, 2017 at 5:25 pm

You all got me, I’m a charlatan. Obviously so ignorant that my comments shouldn’t dignify a response.

23 msgkings June 15, 2017 at 5:44 pm

Charlatans are intelligent fakers. You’re just dumb.

24 Gabe Atthouse June 15, 2017 at 6:08 pm

Vicious! I must have rubbed this guy the wrong way. A little too much time at work, eh?

25 Rock Lobster June 15, 2017 at 6:06 pm

“I’m an actuary shit head, my pinky knows more about finance than you and your whole family.”

An actuary? Jeez, where’s JAMRC when you need him?


26 Alan Goldhammer June 15, 2017 at 2:10 pm

“compounded real return of 4.38% with a standard deviation of 11.6%” Pretty nice Standard Deviation!


27 Mike June 15, 2017 at 2:33 pm

Could someone explain what a “compounded real return of 4.38%” is?


28 Brian Donohue June 15, 2017 at 3:09 pm

It means that, on (geometric) average, the purchasing power of your investment increases 4.38% per year.

Over 10 years, such an investment would allow you to buy 53.5% [1.0438^10 – 1] more stuff with the money than you can buy today.


29 Floccina June 15, 2017 at 4:14 pm

And yet many states are counting on 7% for their pensions.


30 Andrew M June 15, 2017 at 4:39 pm

7% real or nominal?


31 msgkings June 15, 2017 at 5:44 pm

Nominal but it’s still a pretty tough benchmark in today’s world.


32 Mark Twain/ June 15, 2017 at 4:37 pm

The policy is quite simple. What Hazel puts into earthly futures (coal) is purely for speculation. What she puts in spiritual futures (cryptography) is purely for investment; she was willing to go into one on the margin, and take chances, though with a grimaced grin and a speckle of nonchalance, but in the case of the other, “margin her no margins” — she wanted to cash in on hundred cents per dollar’s worth, and have the stock transferred on the books. Oh and with her imaginary broker and ginned-up telegraph, we should have seen the rug swirl with fustian water vapor, in valor and so éclat.


33 Cock Piss Partridge June 15, 2017 at 5:43 pm


34 Laurens Swinkels June 16, 2017 at 3:28 am

Hi Gabe,

As one of the authors of the paper I appreciate all feedback, including yours which sounds to me as rather critical. I am still thinking how we could incorporate your feedback in a new draft of the paper.

I am not sure whether you read the entire paper including the footnotes and the appendix, but as far as I can remember we do not require or even recommend that hedge funds be evaluated against the multi-asset market index that we calculate.

Although I am a financial econometrician myself, I work a lot with actuaries in my job in the financial industry. The actuaries I know have a good finance education, and therefore can appreciate the Capital Asset Pricing Model for its theoretical appeal, even though its empirical performance seems rather weak. The only thing we try to do in this paper, is to actually calculate a return that is close to the market portfolio (which, in theory, also includes non-tradables), which is an input for testing the model. Others, less interested in the finance theory, might just wonder why they themselves are different from the average investor, and compare their returns against that of the average investor.

In any case, please feel free to ignore our paper if it does not match your interest. We do hope there are others out there that appreciate our data collection efforts over the past couple of years.

Best wishes, Laurens


35 paul June 16, 2017 at 12:00 pm

Laurens, I have one comment on the “market portfolio.” I think of the positive expected risk premium coming from risky assets that perform badly for me in “bad times” a la Sharpe. Claims on firms (stocks and corp debt) are good examples of this. To me, things like real-estate, inputs to production (commodities) and even govt bonds (a transfer of wealth from tax payers to bond holders) don’t really fit in that category. Looking at the graph of the efficient frontier, its looks like a portfolio of the “risky asset” (global equities) and the riskless asset (cash) would dominate all other portfolios. But then again being a CAPM zealot, maybe I’m just seeing what I what to see ; )



36 Laurens Swinkels June 16, 2017 at 5:41 pm

Hi Paul,

As far as I understand, the CAPM requires all assets, both investable and non-investable, to be in the market portfolio. This includes collectible stamps, human capital, durable goods, etc etc. It is Roll’s critique that we cannot really observe the market portfolio, and therefore never test the CAPM. This implies that if you are a CAPM zealot (does that mean ‘fan’?) you should encourage us to include more assets, rather than only focus on equities.

Of course, it is not our claim that there is only one risk factor. Multiple extensions have been proposed and are being tested. It is entirely conceivable that inflation risk is more important for bond risk premia, while real growth risk is for equity returns. And these two risk factors might sometimes be positively correlated, and at other times negatively, and depend on the investment horizon (i.e. an inflation-linked bond is risk-less in real terms at maturity assuming no default risk, but its market value changes before maturity based on changes in the real interest rate). I don’t have the answer to these questions. Our ambition is much more modest, we try to determine the return on the global market portfolio going back to 1960. How to best use this information probably depends on the research question at hand. We have some ideas as we state in the paper, but they need not be the same as where your interest lies.

From the figure, I don’t see what you see. Mostly, because from the individual dots you cannot see correlation effects. The individual asset categories almost line up perfectly, but because they are not perfectly correlated, combining them leads to a better risk-return trade-off. At least, that is my eye-ball econometrics at work.

Best wishes, Laurens


37 Ricky Tylor June 16, 2017 at 8:30 am

It is always important to judge out the right risk/reward as that is only way forward. It’s easier for me with broker like OctaFX who got outstanding set of scheme with ultra-tight spreads at 0.1 pips for all major pairs, rebate program where we get up to 15 dollars per lot size trade even if it’s lost, so that’s very cool and helps out in working. I also feel good with their active customer service that’s very friendly and helpful.


Leave a Comment

Previous post:

Next post: