Why there are better options than investing only in the MSCI World

The MSCI World, a widely popular global index among investors, may at first appear to be a smart choice due to its equity diversification and the ease of investing via index funds or ETFs.

However, at inbestMe we believe that investing exclusively in the MSCI World may cause you to overlook many opportunities and expose your portfolio to unnecessary risks — especially for a significant number of investors.

Below, we present four reasons why concentrating all your capital in the MSCI World may not be the best idea, and why opting for a more diversified portfolio is preferable:

1. Limited to Equities Only

The MSCI World invests solely in equities (stocks), which prevents exposure to other key asset classes such as bonds, cash, real estate, or gold. These assets are essential to mitigate volatility and balance portfolio risks. An optimally built portfolio should diversify across various asset classes.

Equity-only investing might be justified for part of your capital and for very long-term horizons, but it is not suitable for all your assets.

2. Restricted to Developed Markets

Even if we wanted to invest only in equities, the MSCI World includes just about 1,600 large companies from 23 developed countries. It does not include emerging markets like China, Brazil, India, or South Africa — economies that represent a growing share of global economic growth. Investing only in the MSCI World means missing out on that potential.

As seen in the top chart, since the 2022 low, the MSCI Emerging Markets index has clearly outperformed the MSCI World by nearly 20 percentage points.

3. Excludes Small Companies with High Potential

The MSCI World index includes only the largest companies in the (developed) world, excluding — in addition to emerging countries — many small and mid-sized companies with greater growth potential. Exposure to small caps can be key to capturing new opportunities. In fact, since 2000, small companies have outperformed the MSCI World by 222 percentage points.

However, this contrasts with the period since 2020, when small caps (+56%) have clearly lagged behind the MSCI World (+93%), with a 27-point difference.

4. Heavy U.S. Bias

The index’s regional distribution is based on global market capitalization. As a result, more than 70% of the index is concentrated in the U.S., which may not be ideal for all investors (especially non-Americans). This means that investing in the MSCI World is almost equivalent to investing only in the S&P 500 and in U.S. dollars (unless using a hedged version).

As shown in the top chart, in recent years investing only in the S&P 500 has been advantageous. But this isn’t always the case — as we saw when reviewing whether investing only in the S&P 500 is a good idea.

Diversified Portfolios

At inbestMe, we build diversified portfolios tailored to your financial goals, risk profile, and base currency. Unlike investing in a single index, our portfolios combine multiple asset classes, geographic regions (including emerging markets), and company sizes. This approach allows for better risk management and optimization of multiple sources of long-term returns.

Even for profile 10, focused exclusively on equities, we adjust the geographic exposure to match the client’s main currency. We also include complementary assets such as emerging markets, small companies, and a minimal exposure to real estate, thereby maximizing the benefits of diversification.