Three markets, three masterclasses
The US market shows what decades of compounding can deliver. Japan shows what happens when you pay any price for it. Korea shows why governance and shareholder returns are not footnotes. A long-horizon investor should understand all three — especially if you live in one and invest in another — and worth a short look further out, at the emerging markets everyone eventually asks about.
"In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
The compounding benchmark
The S&P 500's long-run average total return is roughly 10% a year in nominal terms (about 7% after inflation), measured from 1926 through 2024 with dividends reinvested. That average hides violent decade-to-decade variation — the 2000s returned roughly zero, the 2010s were exceptional — but the source of the return is not mysterious: over long periods it is earnings growth plus dividends, with valuation changes adding noise that matters less the longer you hold.
| Index | What it holds | For a long-term holder |
|---|---|---|
| S&P 500 | ~500 large US companies, ~80% of US market value | The default core holding; enormous, cheap fund choices in every country covered here. |
| Total US Market | Several thousand large, mid and small caps | Slightly broader than the S&P 500; in practice the two track each other closely. |
| Nasdaq-100 | 100 largest non-financial Nasdaq companies, tech-heavy | A concentrated growth bet, not a diversified core. It fell ~80% in 2000–2002 and took about 15 years to reclaim its 2000 peak — position-size accordingly. |
| Dividend growth indexes | Companies with long streaks of raising dividends | A popular tilt for income-focused decades-long holders; see Strategy. |
Why has the US compounded so well? Deep capital markets, relentless corporate focus on shareholder returns, global revenue reach, and an unmatched pipeline of new dominant companies. Be careful with the conclusion, though: "the US always wins" is a historical observation, not a law. It is a strong reason to make US equities a core holding; it is a weaker reason to hold nothing else. Many long-horizon investors pair a US core with a global ex-US fund precisely because nobody gets a guarantee.
The world's most important cautionary tale — read carefully
In December 1989 the Nikkei 225 peaked near 39,000 at the height of an asset bubble, trading at price-earnings multiples several times those of other developed markets. It then fell for over a decade and did not close above its 1989 peak until February 2024 — a 34-year round trip. This is the scenario every long-term investor must be able to answer for, and there are three honest lessons in it:
- Price matters even for the patient. "Stocks always come back" failed for a lump sum invested at 60–70× earnings. Buying an entire market at extreme valuation can consume your whole investing lifetime. Time dilutes normal valuations; it does not rescue absurd ones.
- Concentration in one country is a real risk. In 1989 Japan was ~40% of world market value and its permanence felt as obvious as anything feels today. A Japanese investor who also owned world equities experienced a completely different three decades than one who owned only the Nikkei.
- Steady buying changes the story. The 34-year figure describes a single unlucky lump sum at the exact top. An investor who dollar-cost averaged into the Japanese market through the 1990s and 2000s accumulated shares at depressed prices for years and returned to profit far sooner — and with dividends reinvested, the broader TOPIX recovered meaningfully earlier than the price-only Nikkei story implies. Bad decades punish lump-sum tops hardest and steady savers least.
Modern Japan is a different market: the Tokyo Stock Exchange has been pressuring companies trading below book value to improve capital efficiency, buybacks and dividends have risen sharply, and the Nikkei finally made new all-time highs in 2024. For a Japanese resident, the practical takeaways live on the Accounts & Tax page and the NISA guide: the new NISA makes decades-long compounding in US or global index funds tax-free, and the yen/dollar exchange rate — not stock picking — will be the biggest swing factor you actually feel.
| Index | What it is | Note |
|---|---|---|
| Nikkei 225 | Price-weighted index of 225 large companies | The famous headline number; quirky price weighting overweights high-priced shares. |
| TOPIX | Cap-weighted index of the broad TSE Prime market | The better representation of "the Japanese market"; preferred by most index funds. |
The governance lesson — and the 서학개미 wave
Korea's economy produced world-class companies, yet the KOSPI spent most of 2011–2020 trapped in a sideways range investors nicknamed the "Box-pi". The gap between corporate quality and shareholder returns has a name — the "Korea discount" — and well-understood causes: low dividend payout ratios, complex chaebol cross-shareholdings, controlling-family incentives that don't align with minority shareholders, and heavy index concentration in cyclical exporters (semiconductors above all).
The lesson for a long-term investor is subtle and important: GDP growth and stock returns are not the same thing. What compounds for shareholders is earnings per share that is actually returned or reinvested on their behalf. Korea's 2024 "Corporate Value-up Program", modeled on Japan's reforms, is an attempt to close exactly this gap — worth watching, because if payout culture genuinely changes, cheap markets can re-rate dramatically.
Meanwhile millions of Korean retail investors — nicknamed 서학개미 ("Western-learning ants") — moved savings into US stocks directly. The instinct (own global winners, escape the discount) fits a long-horizon plan well, but the execution often doesn't: concentrated single-stock bets, leveraged ETFs, and frequent trading are the opposite of what made US returns attractive in the first place. A Korean investor holding a broad US index fund for 20 years also needs to understand the 22% overseas capital-gains tax, 15% US dividend withholding, and the US estate-tax exposure — all covered in Accounts & Tax.
| Index | What it is | Note |
|---|---|---|
| KOSPI | Broad index of the Korea Exchange main board | Heavily influenced by a handful of exporters; Samsung Electronics alone has often exceeded 20% of market value. |
| KOSPI 200 | 200 largest KOSPI companies | The standard basis for index funds and derivatives. |
| KOSDAQ | Growth/venture board | Higher volatility, historically weak long-run index returns despite individual winners. |
Emerging markets — China, Malaysia, and the growth trap
Sooner or later every long-horizon investor asks the same question: if China, India, or Southeast Asia will grow faster than the US over the next twenty years, shouldn't some of the money go there? It is a fair question with an uncomfortable answer. Economic growth and shareholder returns are not the same thing — the lesson from the Korea section above, written much larger.
China is the clearest case. Its nominal GDP roughly doubled over the 2010s, and a dollar-based investor in a broad Chinese equity index still earned very little across that decade. Index earnings per share were diluted by relentless new share issuance, capital was allocated by policy as much as by profit, and from 2021 regulatory intervention in technology, tutoring, and property repriced entire sectors in a matter of weeks. The growth was real. Very little of it reached minority shareholders abroad.
| Market | What a long-term holder should know | The risk that shows up over decades |
|---|---|---|
| China | The largest weight in most emerging-market indexes. Onshore A-shares, Hong Kong-listed H-shares, and US-listed ADRs are three different legal wrappers on the same economy. | Policy risk is the dominant variable. Most US-listed Chinese shares are Cayman holding companies attached to the operating business by contract (a "VIE") — you own a claim on cash flows, not the company. |
| India | The strongest domestic growth story in the index, with a deepening base of local investors buying every month through systematic plans. | The rupee has depreciated against the dollar for decades, and Indian large-caps have often traded at a clear valuation premium to the rest of emerging Asia. Both take a bite out of a foreign holder's return. |
| Taiwan | The most profitable slice of emerging Asia, and the physical chokepoint of the AI supply chain described in AI & Stocks. | Extreme concentration — TSMC alone has at times been worth roughly a third of the entire market — layered on top of a geopolitical risk that no valuation model prices well. |
| Malaysia | A small, mature market: the KLCI is about thirty large caps concentrated in banks, utilities, telecoms, and plantations, with a large Shariah-compliant segment and a domestic pension fund as a permanent buyer. | Slow index-level growth, a ringgit that has weakened against the dollar over long stretches, and a precedent worth remembering — in 1998 Malaysia met the Asian crisis with capital controls and a currency peg. In emerging markets the rules themselves can change on a foreign holder. |
Broad emerging-market indexes cover about two dozen countries and sit at roughly a tenth of global equity value. Classification is a moving target: MSCI still counts Korea as emerging while FTSE Russell promoted it to developed years ago, and Vietnam — the market ASEAN enthusiasts ask about most — is still classified as frontier.
Four things that quietly eat the return
- Currency. Emerging-market currencies have tended to weaken against the dollar over long periods. A good local-currency decade can land in your account as a mediocre one.
- Dilution. Fast-growing economies fund themselves by issuing shares. Earnings per share — the thing you actually own — grow far more slowly than GDP.
- Governance. State priorities, related-party dealings, and weak minority protections decide how much of the profit is ever yours.
- Friction. Higher expense ratios, wider spreads, dividend withholding, and occasionally a legal structure that doesn't give you the asset you think you bought.
If you want the exposure
- Check what you already own. A global all-country index fund already holds emerging markets at market weight. Many people asking how to add EM have owned it all along.
- Prefer one broad fund to country bets. Single-country funds ask you to forecast; a diversified index only asks you to be patient.
- Size it as a satellite. A single-digit percentage on top of market weight, bought on the same schedule as everything else and rebalanced by rule, is the version of this that survives a bad decade.
- Count your non-portfolio exposure. If your salary, home, and pension are denominated in won or ringgit, you already carry emerging-market risk before the first purchase.
Holding US stocks in yen or won terms
If you live in Japan or Korea and buy US stocks, you own two exposures: American companies and the dollar. Over a single year, the exchange rate can easily move 10–20% and dominate your statement. Over 20–30 years, equity returns have historically dwarfed net currency drift — but the currency still decides how smooth the ride feels and what your money buys at home when you finally sell.
The practical defaults
- Unhedged is the common long-horizon default. Hedging costs roughly the interest-rate differential every year, which compounds into a real drag over decades — and for a JPY or KRW investor that differential has often been substantial.
- Dollar-cost averaging averages the currency too. Buying monthly for decades means you buy dollars cheap and expensive in turn, rather than betting your whole stake on one exchange rate.
- Match currency to future spending. Money you will spend in yen or won within a few years doesn't belong in unhedged dollar assets at all.
What not to do
- Don't switch between hedged and unhedged funds based on exchange-rate forecasts — that is currency trading with extra steps.
- Don't judge a 30-year plan by one year of currency pain; a weak home currency flatters your returns, a strong one hides them, and neither changes the underlying businesses.
- Don't forget that your salary, pension, and home already tie most of your life to your home currency — some foreign-currency assets are a diversifier, not a risk.
The three markets at a glance
| United States | Japan | Korea | |
|---|---|---|---|
| Core indexes | S&P 500, Total Market | TOPIX, Nikkei 225 | KOSPI, KOSPI 200 |
| Defining long-run trait | Persistent earnings growth and shareholder-return culture | Post-bubble stagnation, then governance-led revival from the 2010s | World-class companies at a persistent valuation discount |
| Signature risk | Concentration in a few mega-caps; valuation at entry | Demographics; decades lost after a valuation bubble | Governance, chaebol structure, export cyclicality |
| Lesson it teaches | Let compounding run | Never pay any price, never hold only one market | Shareholder treatment drives returns, not GDP |