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Weekend reading: The 7/93 portfolio

What caught my eye this week.

Even the most strategically disinterested passive investor [1] – 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 [2] 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 [3] (again).

Last year already proved that particular obituary to be premature [4] (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.

Risky business

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 [5] 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 [7] 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 [8], 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!

From Monevator

Our 10-year asset class returns quilt for UK investors – Monevator [12]

FIRE-side chat rekindled: a year in the country – Monevator [13]

From the archive-ator: Become your money hero – Monevator [14]


Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK economy will be £311bn-a-year smaller due to Brexit by 2035, study finds… – Sky [15]

…here’s the full report – Cambridge Econometrics [16]

Blackrock warns of politics-inspired backlash in UK bond market – Proactive Investors [17]

Craft beer giant Brewdog abandons real living wage for employees – BBC [18]

UK residential property discounts narrow as sellers lower prices [Search result]FT [19]

Apple to release its possibly revolutionary Vision Pro headset on 2 February – Apple [20]

There’s a huge and barely-reported Covid surge going on globally right now – Wired [21]

Huge ancient city found in the Amazon – BBC [22]


The FTSE’s biggest companies over time [Animated on FT, search result]FT [24]

Products and services

NS&I cuts Premium Bonds prize fund rate to 4.4% – Which [25]

A bigger deposit doesn’t lower mortgage rates as much these days – This Is Money [26]

Get between £100 and £1,500 cashback when you open an ISA with Interactive Investor [27] before 31 Jan. New customers only. Minimum £2,000 deposit. Terms apply. Capital at risk – Interactive Investor [27]

Barclays and Santander cut mortgage rates as competition intensifies – BBC [28]

How does TSB’s new rewards portal compare with getting cashback? – Which [29]

Aldermore’s new regular savings account pays 5.25% – This Is Money [30]

Open an account with low-cost platform InvestEngine via our link [31] and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine [31]

Streaming price hikes: how Netflix, Prime, and others have all gone up – This Is Money [32]

Dating apps test just how much users will pay for love [Search result]FT [33]

British Gas earns rave reviews for revamped five-star service – This Is Money [34]

Homes for sale near swimming pools, in pictures – Guardian [35]

Comment and opinion

Are you in control of your investment decisions? – Index Fund Advisors [36]

Myth-busting the new side-hustle tax rules – Be Clever With Your Cash [37]

Wear the same thing most days – Slate [38]

Do stocks really make sense for the long run?  – Morningstar [39]

Larry Swedroe: 12 lessons the market taught investors in 2023 – Morningstar [40]

Winning the game: retiring at 57 with $4.2m – Best Interest [41]

You don’t need everything you want – Vox [42]

Quitting the corporate life to become a crossing guard [US but relevant]Slate [43]

Five things you need to know before you retire – Retirement Manifesto [44]

The annuity puzzle revisited – Center for Retirement Research [45]

Final chapter – Humble Dollar [46]

The easily-amused mind is simply happy – Mr Stingy [47]

New Year, new ramble by @ermineSimple Living in Somerset [48]

[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 [49]

Dave Nadig: why a Bitcoin ETF doesn’t matter – ETF Trends [50]

Vanguard says it won’t offer spot Bitcoin ETFs on its [US] brokerage – The Block [51]

Bitcoin falls on ETF launch, while ether heads for an 18% gain on week – CNBC [52]

Naughty corner: Active antics

Reviewing a 12-year-old UK dividend stocks portfolio – UK Dividend Investor [53]

The periodic table of commodity returns [Infographic]Visual Capitalist [54]

Uranium prices just hit highest level since 2007 – Semafor [55]

The ‘riptide’ economy explained – Axios [56]

Kindle book bargains

What They Don’t Teach You About Money by Claer Barrett – £1.99 on Kindle [57]

Kleptopia: How Dirty Money is Conquering the World by Tom Burgis – £0.99 on Kindle [58]

Fooled by Randomness by Nassim Taleb – £1.99 on Kindle [59]

Make Your Bed by William McRaven – £0.99 on Kindle [60]

Environmental factors

2023 saw the hottest global temperatures on record – Copernicus [61]

The UK farmers holding off flooding the natural way – Guardian [62]

Humpbacks rebound in 20th-Century whaling hotspot – Hakai [63]

World’s renewable energy capacity grew at record pace in 2023 – Guardian [64]

The backlash against ESG seems to have gone nowhere – Klement on Investing [65]

Building a sustainable planet – Faster, Please! [66] [hat-tip Abnormal Returns [67]]

Kew Gardens names mysterious plants and fungi new to science – BBC [68]

Off our beat

“We need jungle”: how University Challenge spawned a remix craze – BBC [69]

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 [70] model]The Verge [71]

Nice view. Shame about all the tourists – Noema [72]

The nature of evil – We Are Gonna Get Those Bastards [73]

What democracy loses when we lose trust – The Atlantic via MSN [74]

Understanding human stupidity in the post-truth era – Klement on Investing [75]

How to read more books than ever in 2024 – Inside Hook [76]

Evolution is not as random as previously thought – Phys.org [77]

Avoiding technology – Seth Godin [78]

Years don’t make you old – A Teachable Moment [79]

And finally…

“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 [80]

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