Doubts are an integral part of investing.

If things go well, investors wonder how much longer they'll be able to enjoy this pleasant experience.

And when things go badly, they are all the more concerned: was their own investment decision really the right one?

Dennis Kremer

Editor in the “Value” section of the Frankfurter Allgemeine Sunday newspaper.

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In 2022, a group of investors who were previously unaccustomed to this feeling have also had their doubts.

We are talking about all those who have bet on the MSCI World stock index with the help of index funds, so-called ETFs.

This index tracks the performance of currently around 1,500 stock corporations from 23 industrialized countries and has been a cause for celebration for many years.

In the past decade and also during the Corona crisis, the index has mostly developed well and has thus become a reference for investors from all over the world.

Professional fund managers compete with it, private investors invest in it in droves, and the FAS has also often recommended the MSCI World.

This year, however, the index and all ETFs that track it have lost almost a fifth of their value.

This is worse than, for example, the German Dax, which fell slightly less into the red with a minus of around 15 percent.

Some people are now wondering: in times when there is so much movement on the financial markets, is the MSCI World still the right index for investing in equities from all over the world?

Or is it better to switch to other, alternative investment concepts?

Because there are: the concept of equalization, for example, or the concept of weighting according to economic performance.

Both have yet to be explained.

The pros and cons of the MSCI World

If you want to assess the various possibilities, you first have to know the starting model.

The MSCI World, which incidentally takes its name from the index provider MSCI, follows the principle of market capitalization.

This means that the more successful the price development of a company and the higher the number of freely tradable shares, the greater its weight in the index.

That is why shares in the iPhone manufacturer Apple have long been the most important individual stock in the MSCI World at around five percent, followed by other technology stocks such as the software manufacturer Microsoft and the online retailer Amazon.

"The stocks that weigh the most in public perception also dominate the MSCI World," said Ali Masarwah, analyst at fund comparison platform Envestor.

"That's both an advantage and a disadvantage."

The advantage is obvious: anyone who invests in around 1,500 individual stocks using the index spreads their assets across many stocks on the one hand and still has the most important stocks in the world in their portfolio on the other.

But therein lies the downside: The principle of market capitalization rewards the companies that have had the best performance on the stock market in the past.

This can pay off for many years, but it doesn't always go well, as the past few months have shown.

The prices of technology stocks fell significantly for the first time since a long upswing, which contributed significantly to the poor performance of the MSCI World.

No access to small and mid caps

Now this could still be dismissed as the usual ups and downs in prices, which cannot just go up forever.

However, the structure of the MSCI World means that investors inevitably have no access to stocks that are often particularly worthwhile: We are talking about so-called small and mid caps - i.e. companies with medium or even lower market capitalization.

Some of these companies eventually become so successful that they too become heavyweights on the stock market: the earlier investors invest in them, the more they benefit.

MSCI World investors largely have to do without this effect.

If you take a closer look, it is also noticeable that the index is not an example of good diversification in one respect: Despite the 1,500 different individual values, stock corporations from the USA have an enormous weight in the index with a share of 70 percent.

Of course, this has to do with the fact that the United States is the largest and most important stock exchange in the world.

But it is probably not what investors who invest in a supposed world index expect.