Buying index funds is a plausible strategy for passive investors. It does not require too much time and knowledge. Even Warren Buffett said: for most people, the best thing is to do is owning the S&P 500 index fund. But, buying the wrong index can be problematic like selecting the wrong stocks.

Major stock markets compared to the S&P 500

With reference to the above illustration, United States index performs the best. Purchasing US index looks like a very good investing in the last 20 years (up 900%). But, what is interesting is that not all countries indexes perform well. For example, Japan’s Nikkel only upped 1%. UK’s FTSE100 and France’s CAC 40 only upped around 250%.

Let’s look at an even longer time frame started from 1800s.

There was a shift in power in the mid-1800s. The return of US stocks was better than the UK, France, and Germany. If we put that in the context of history, the power of Europe had come to the end before the two world wars and after the world wars, the US became the world’s dominant power.

For most of us, our investing life may only last for 50-70 years. We are just experiencing a small part of the rise and fall of nations/empires/kingdoms. But, the good news is it is relatively easy to distinguish who is the dominant power and who has the ability to challenge her status.

For the indexing strategy to work, we need to select the index in the world’s dominant power. If someone can challenge her status, we are also better off to bet on both of them.

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