What caught my eye this week.
Even the most strategically disinterested passive investor – that’s a compliment, incidentally – will know that the biggest US technology firms were what drove global equity returns higher last year.
I featured dozens of links in 2023 to articles charting the rise of the so-called ‘Magnificent Seven’.
Behemoths such as Microsoft, Amazon, Apple, and Alphabet that couldn’t possibly get any more highly-valued. Until they did!
Broaden the lens to the asset allocation level and things were almost as skewed. Not only did a handful of mega-cap equities drive returns – but equities, especially US ones, were really the only game in town.
And let’s not remind ourselves of the nightmare of 2022.
But okay, if we must then you’ll recall it was the year that diversification utterly failed and pretty much every asset went down. Starring, of course, the worst bond bear market in several generations.
Very high inflation and rising rates sent bond yields soaring and bond prices crashing.
This was not unpredictable given the pace of rate rises (which were unpredictable).
But it did make one despair of owning a diversified portfolio, and saw the 60/40 portfolio written off as dead (again).
Last year already proved that particular obituary to be premature (again, again). Especially in the US.
But while an end to the free fall in bond prices didn’t hurt, the truth is the 60/40’s decent showing was in no small part due to those biggest tech companies returning 50-100% or more in a single year.
So diversification worked, but only because it didn’t get in the way of what really worked.
This all-conquering short-term dominance of equities is not an inevitable state of affairs, as this graphic from Legal and General’s 2024 outlook explains:
The graph shows that from around late 2001 to 2014, investors were rewarded – on a risk-adjusted basis – for having diversified portfolios, compared to if they’d only held global equities instead.
Since then though, more often than not owning anything but equities has been a drag.
This probably won’t last. Not least because high-quality government bonds now boast nominal yields of 4-5% or more thanks to the big sell-off, as opposed to the 1% or so they touted before it.
But also because sooner or later the global slowdown we’ve been promised for 18 months should finally arrive, even if it’s a mild one – and because central banks are due to start cutting rates regardless with inflation falling.
Given all the argy-bargy unfolding on the geopolitical scene, I’d certainly take a recession as the casus incisus that sends bond yields down and hence lifts bond prices – in preference to the potential casus belli rattling across the news.
Indeed Legal and General’s head of asset allocation says:
…this is, in our view, not an environment in which to bet on the concentration of risk. One might be lucky and avoid a crisis but if not, performance could be terrible.
Instead, we believe it’s a matter of spreading risk over multiple regions and multiple return drivers.
Over a longer horizon, we believe diversification should outperform more concentrated portfolios on a risk-adjusted basis.
The historical average of the difference in Sharpe ratios is in favour of diversification, according to our calculations.
First among equals
As I’ve written before, it’s conceivable we’ve entered a late-capitalism endgame where the half-dozen or so mega-companies that got to scale just as AI arrives have the data pools and moolah to win forever.
In which case prepare for either a terrifying dystopia or Ian M. Bank’s culture, to suit your taste.
It seems safer to bet though that the stock market is having one of its moments. That, magnificent though these market darlings indisputably are – perhaps the best businesses we’ve ever seen – they won’t prevail perpetually any more than Vodafone, Standard Oil, or the Dutch East India Company did before them.
In which case it’s probably best to keep a sense of balance. Not least in your portfolio.
More good reads from this week on the theme:
Have a great weekend!
Our 10-year asset class returns quilt for UK investors – Monevator
FIRE-side chat rekindled: a year in the country – Monevator
From the archive-ator: Become your money hero – Monevator
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UK economy will be £311bn-a-year smaller due to Brexit by 2035, study finds… – Sky
…here’s the full report – Cambridge Econometrics
Blackrock warns of politics-inspired backlash in UK bond market – Proactive Investors
Craft beer giant Brewdog abandons real living wage for employees – BBC
UK residential property discounts narrow as sellers lower prices [Search result] – FT
Apple to release its possibly revolutionary Vision Pro headset on 2 February – Apple
There’s a huge and barely-reported Covid surge going on globally right now – Wired
Huge ancient city found in the Amazon – BBC
The FTSE’s biggest companies over time [Animated on FT, search result] – FT
Products and services
NS&I cuts Premium Bonds prize fund rate to 4.4% – Which
A bigger deposit doesn’t lower mortgage rates as much these days – This Is Money
Get between £100 and £1,500 cashback when you open an ISA with Interactive Investor before 31 Jan. New customers only. Minimum £2,000 deposit. Terms apply. Capital at risk – Interactive Investor
Barclays and Santander cut mortgage rates as competition intensifies – BBC
How does TSB’s new rewards portal compare with getting cashback? – Which
Aldermore’s new regular savings account pays 5.25% – This Is Money
Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Streaming price hikes: how Netflix, Prime, and others have all gone up – This Is Money
Dating apps test just how much users will pay for love [Search result] – FT
British Gas earns rave reviews for revamped five-star service – This Is Money
Homes for sale near swimming pools, in pictures – Guardian
Comment and opinion
Are you in control of your investment decisions? – Index Fund Advisors
Myth-busting the new side-hustle tax rules – Be Clever With Your Cash
Wear the same thing most days – Slate
Do stocks really make sense for the long run? – Morningstar
Larry Swedroe: 12 lessons the market taught investors in 2023 – Morningstar
Winning the game: retiring at 57 with $4.2m – Best Interest
You don’t need everything you want – Vox
Quitting the corporate life to become a crossing guard [US but relevant] – Slate
Five things you need to know before you retire – Retirement Manifesto
The annuity puzzle revisited – Center for Retirement Research
Final chapter – Humble Dollar
The easily-amused mind is simply happy – Mr Stingy
New Year, new ramble by @ermine – Simple Living in Somerset
[US] spot Bitcoin ETFs approved mini-special
Most UK investors can’t buy these US ETFs. Links for big picture/posterity.
The ins-and-outs of the spot Bitcoin ETFs – Morningstar
Dave Nadig: why a Bitcoin ETF doesn’t matter – ETF Trends
Vanguard says it won’t offer spot Bitcoin ETFs on its [US] brokerage – The Block
Bitcoin falls on ETF launch, while ether heads for an 18% gain on week – CNBC
Naughty corner: Active antics
Reviewing a 12-year-old UK dividend stocks portfolio – UK Dividend Investor
The periodic table of commodity returns [Infographic] – Visual Capitalist
Uranium prices just hit highest level since 2007 – Semafor
The ‘riptide’ economy explained – Axios
Kindle book bargains
What They Don’t Teach You About Money by Claer Barrett – £1.99 on Kindle
Kleptopia: How Dirty Money is Conquering the World by Tom Burgis – £0.99 on Kindle
Fooled by Randomness by Nassim Taleb – £1.99 on Kindle
Make Your Bed by William McRaven – £0.99 on Kindle
2023 saw the hottest global temperatures on record – Copernicus
The UK farmers holding off flooding the natural way – Guardian
Humpbacks rebound in 20th-Century whaling hotspot – Hakai
World’s renewable energy capacity grew at record pace in 2023 – Guardian
The backlash against ESG seems to have gone nowhere – Klement on Investing
Building a sustainable planet – Faster, Please! [hat-tip Abnormal Returns]
Kew Gardens names mysterious plants and fungi new to science – BBC
Off our beat
“We need jungle”: how University Challenge spawned a remix craze – BBC
How the Internet was reshaped around Google [A must-read if you don’t know, and why Monevator is trying to move to a membership model] – The Verge
Nice view. Shame about all the tourists – Noema
The nature of evil – We Are Gonna Get Those Bastards
What democracy loses when we lose trust – The Atlantic via MSN
Understanding human stupidity in the post-truth era – Klement on Investing
How to read more books than ever in 2024 – Inside Hook
Evolution is not as random as previously thought – Phys.org
Avoiding technology – Seth Godin
Years don’t make you old – A Teachable Moment
“The ease of online dealing makes many people act as if investing was positively scored, but the arithmetic of compounding dictates that it is really negatively scored. Success in investing consists mainly of avoiding big mistakes.”
– Guy Thomas, Free Capital
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