Looking to the future is always a bit hazy

Do recent returns give investors FOMO – fear of missing out? Samuel Kirton shows why investors should gain comfort by holding a broad market exposure.

Most investors are aware that, in the past few years, the US market has delivered above-average returns, compared to many other markets. 

There has also been quite a lot written in the media lately pointing out that just a handful of stocks have driven most of its returns.

As the old saying goes, investing is simple but not easy.

It is simple to look back at market data today and wish that we had, for example, owned more US equities and less UK and emerging market equities over the past ten years, given their annualised returns of around 14.5%, 5.0% and 6.5%, respectively. 

Yet that would be to succumb to ‘recency bias’, where one is influenced largely by what has just happened and extrapolating this into the future.

The difficult part is knowing, instead, that you need to build and own a robust portfolio for the future that will work for you across a potentially wide range of unknown market events and outcomes.

Eggs in one basket

If one were to be influenced by the recent returns of the US market and allocate more assets to it, one would risk having all of their investment eggs in one basket. 

As it is, the US already represents around 62% of global market capitalisation across developed and emerging markets. 

Students of market history will also recall that the US market suffered what has become known as the ‘lost decade’ in the 2000s where the market went sideways over a ten-year period.

If we look at data from various developed markets from 2004-2023, it is evident that there was no discernible year-on-year pattern that an investor can take advantage of. 

Interestingly, the US stock market has not been the best performer in any of the past 20 years. 

The best performing market was, in fact, Denmark, which delivered an annualised return of almost 16%, which compares to 11% for the US and 9.4% for developed markets as a whole. 

And the Danish market has been driven largely by one stock – Novo Nordisk, which is 60% of the market!

The reality is that markets work pretty well at incorporating information into prices, and trying to beat the market – through either market timing or stock picking – is a tough game, with very few winners. 

Simply making your investment bed out of exposure to a diversified market and lying in it over time makes a huge amount of sense in the absence of market timing signals and an ability to foresee the future.  

‘Since the future cannot be predicted, it is impossible to specify in advance what the best asset allocation will be. Rather, our job is to find an allocation that will do reasonably well over a wide range of circumstances.’

William Bernstein, author of The Intelligent Asset Allocator.

Samuel Kirton (right) is a financial planner with Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS

The content of this article is for inform­ation only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
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