What caught my eye this week.
People have a hard time with diversification these days, and it’s easy to see why.
- Developed world government bond yields are still pretty tiny compared to most of the past few decades.
- UK inflation-linked bonds are so dear they even scare [1] my purist co-blogger The Accumulator.
- Cash pays you less than nothing, in real terms.
- Gold, if you like that sort of thing, has been stuck in a bear market for half a decade.
Meanwhile, global shares rally on. Why diversify and give up the gains? Yes, equities look expensive but so does everything else.
TINA, some pundits have dubbed such thinking. There Is No Alternative.
If you can stomach the volatility that will come with the inevitable big stock market crashes, then maybe TINA isn’t the worst date in town. I have been 95-100% in shares at some points over the past decade, so I’m not going to judge you. Shares should outperform other assets over the very long-term, despite the plunges.
There’s no rule that says you have to diversify, just because in theory it will mean a better risk-reward profile for your portfolio. You don’t get style points in investing.
If what you care most about is long-term returns – perhaps because you’re young, or because you’re investing spare money that isn’t underwriting next month’s rent – then going all-in on shares might be reasonable in these tricky times. (Especially if you’ve got a bit of home bias going on. UK shares look cheaper than most, in my view.)
However I would guard against pretending you have diversification that won’t hold up in reality.
Dreamy diversification
I often hear people say that instead of bonds they hold dividend shares, or value shares, or infrastructure funds, or some obscure investment trusts.
The theory, I guess, is these all pay a bit of income so therefore they are a bit like a bond.
Well, perhaps a very little bit.
In reality if markets do plummet 25% in a crash, you’ll probably get your 3% income from a dividend share, say. True. But they’ll still almost certainly take a 20%+ capital loss on the chin, too. Perhaps they’ll even do worse than the wider market, given how popular dividend shares have been since 2009.
Similarly, investment trust discounts can often widen sharply in an equity scare, even if the potentially alternative assets they own do stand up better than the market.
Correlations and consequences
The following graph from Tensile Trading shows three-year correlations for US assets. UK assets will behave much the same.
Note: The stuff that might really hold up in an equity crash is towards the bottom.
Source: StockCharts.com [2]
Yes, it hurts to see the case for lousy old bonds. Honestly, I’m just as miffed as you are.
At this point in a typical cycle we might normally expect to move some of our share winnings into cash and government bonds paying 4-8% or so. To be fearful when others are greedy, as the Sage of Omaha [3] says.
But we can’t get those rates, for all the post-crisis reasons we’ve all read about for the past 10 years.
I understand it’s hard to buy government bonds set to pay you less than 2% a year for the next five years. But if stock markets fall 20%, then that would be a relative return of 18% to the good, even before any potential capital rise.
Am I predicting an imminent crash? No, I don’t think anybody can do that. I do think a correction of some sort is probably drawing near, for what it’s worth. (Very little). But who knows about the timing.
I’m simply saying that if you want to diversify your portfolio, then own assets that actually diversify your portfolio.
Yes, they may be a drag. But if nothing does badly in your portfolio, it’s usually a sure sign that you weren’t really diversified, after all.
- For more on asset allocation in the current environment, watch this recent conversation with David Swensen [4], famed manager of the Yale endowment fund.
From Monevator
Revisiting The Permanent Portfolio – Monevator [5]
From the archive-ator: Don’t waste money buying expensive gifts – Monevator [6]
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1 [7]
UK banks have two million customers stuck in permanent overdraft – Guardian [8]
Limited companies now ‘the norm’ for buy-to-let landlords [Search result] – FT [9]
Average first-time buyer deposit forecast to rise to £81,000 within 10 years – ThisIsMoney [10]
How a second-homes boom is hollowing out one Yorkshire village – Guardian [11]
[12](Click to enlarge)
Trump’s ‘forecast’ for 6% GDP growth more than twice the US 30-year average – CNBC [13]
Products and services
National Savings brings back Growth and Income Bonds paying up to 2.2% – NS&I [14]
UK rail passengers face biggest fare rise in five years – Guardian [15]
Vanguard launches investments for those retiring in the 2060s – ThisIsMoney [16]
The over-70s who mortgage their homes to pay for care – Telegraph [17]
Ten ways to cut the cost of a private school education [Search result] – FT [18]
BlackRock and Vanguard less than a decade from managing $20 Trillion – Bloomberg [19]
Bestinvest was voted ‘Best low-cost SIPP provider 2017’ by FT readers – Bestinvest [20]
Vanguard readying to launch Smart Beta ETFs in the US – Seattle Times [21] [via Mike [22]]
Comment and opinion
We are in a bubble – Neil Woodford [23]
Fed narratives can be dangerous for your portfolio – Pragmatic Capitalism [24]
Financial literacy: A problem for the many, not the few – DIY Investor UK [25]
Can index funds be a force for sustainable capitalism? – Harvard Business Review [26]
Merryn: 2017 was year of consequences for investors [Search result] – FT [27]
UK FIRE folk are fortunate compared to other Europeans – Simple Living in Suffolk [28]
Loadsa loadsa loadsa – SexHealthMoneyDeath [29]
Get rich with… feminism – The Escape Artist [30]
Seed investing into unlisted start-ups is in a slump – AVC [31]
The case for combining different ‘return factors’ [Geeky; clear graphs] – Factor Research [32]
Most portfolios aren’t very efficient, academically speaking [Geeky] – Flirting With Models [33]
Cryptocurrency follow-up
By February 2020, bitcoin will use as much electricity as the entire world does today – Grist [34]
Bitcoin hasn’t replaced cash, but investors don’t care – New York Times [35]
A taxi driver who cashed out his ISAs to buy bitcoin – ThisIsMoney [36]
Larry Swedroe: Bitcoin and its risks – ETF.com [37]
A sober view on crypto, with Adam Ludwin [Podcast] – Invest With The Best [38]
Two sides of the same coin – The Irrelevant Investor [39]
People more interested in bitcoin than were gold at height of the crisis – Telegraph [40]
Bitcoin: Millennials fake gold – Contrarian Edge [41]
A fast million from bitcoin? I don’t want to damage my soul – Guardian [42]
Off our beat
When does work actually get done? – Pricenomics [43]
The harsh history lessons of Brexit [Podcast about UK’s ascension in 1970s] – FT [44]
Unusual weather this year has produced giant apples – Guardian [45]
And finally…
“Always winter but never Christmas.”
– C.S. Lewis, The Lion, the Witch, and the Wardrobe [46]
Like these links? Subscribe [47] to get them every Friday!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [51]]