Saturday, January 30, 2010

Historical Returns for the MSCI EAFE Index

The Morgan Stanley Capital International, Inc. ("MSCI") Europe, Australasia Far East ("EAFE") Index is the benchmark index for foreign equity markets and is the foreign equity equivalent of the S&P 500 Index. The MSCI EAFE Index measures the equity market performance of developed markets in Europe, Australasia, and the Far East, excluding the U.S. and Canada.

The Index includes a selection of stocks from 21 developed markets, the largest of which are Japan and the United Kingdom. The MSCI EAFE Index has been calculated since December 31, 1969 and is the oldest truly international stock index.

The charts below illustrate annual and annualized returns in terms of U.S. Dollars for the MSCI EAFE Index between 1970 and 2009. The Index has returned a total of 3,657% over the past 40 years, or an annualized average of 9.49% per year. The annualized return of the MSCI during its first 20 years of existence (i.e., between 1970 and 1989) was an impressive 15.21%, but the annualized return of the Index over the last 20 years (i.e., between 1990 and 2009) was a much lower 4.05%.

A big reason for the subpar performance of the Index since 1990 is the bursting the the Japanese asset/equity bubble that began in 1990. As I discussed above, Japanese stocks comprise a large portion of the MSCI EAFE Index and therefore the horrible performance of the Japanese stock market since 1990 has dragged down overall returns of the MSCI EAFE Index over the past 20 years. However, the performance of the MSCI EAFE Index during its first 20 years of existence does somewhat compensate for its recent under-performance. The annualized return of the MSCI EAFE Index between 1970 and 2009 of 9.49% only slightly trails the return of 9.87% of the S&P 500 Index during the same time period.

Many investment advisers recommend investing 20-30% of one's equity portfolio in large cap foreign stocks, such as those comprising the MSCI EAFE Index. Vanguard, for example, offers the Developed Markets Index fund that tracks the MSCI EAFE Index.

*** Edit - August 27, 2011 ***
I have updated this chart with results through 2010.

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