Sharing What Goes On
Sticking to the theme of sharing what has gone on, here is a conversation that has been moving along since February.
My problem with larger institutions is that they can be faceless, impersonal, and run one-size-fits-all solutions. Managing a couple of hundred relationships is not a walk in the park, but it does allow me to give those who entrust me with their position a more dedicated overall service.
Here is where we left off with Simon, and you will hopefully be able to gauge the thinking behind my comments.
My Note to Simon
The adjusted longer-term plan was built around a diversified mix of international, US, UK, European and other markets to smooth out the inevitable swings from one region to another.
Chasing the best region in any given year can turn into market timing, and we know that rarely works out. US equities may lag today, but they have led global returns for much of the past decade.
Equally, a strong year for Europe and the UK does not guarantee the same next year. Markets follow cycles, and when one region gets moving, valuations rise and returns tend to normalise afterward.
The US has performed for years, and today it may look expensive versus Europe and the UK by common valuation metrics such as price to earnings ratios. That in itself can be a headwind for further outperformance.
Conversely, the areas doing well now often see a slowdown when valuations catch up.
The global Small Cap Index includes just under 4,000 companies across 23 countries and covers approximately 14% of the free float adjusted market capitalisation in each country. Historically, small caps have shown resilience even amidst economic uncertainties. Looking at the data, the output from small caps in any decade in the last eight, since the Second World War, has been about 14% annualised.
If we tinker further and overweight Europe now, we increase concentration risk. A surprise event, whether political, economic or corporate, could derail regional returns quickly.
Our rebalanced portfolio is designed to capture global growth opportunities wherever they arise, without overexposure to any one economy.
If you felt very strongly, a small tactical tilt of perhaps another 5% of total equity toward Europe and the UK could be considered. But I would recommend staying close to your target weights and revisiting any large-scale rebalance only if a major market regime shift occurs.
Ultimately, what drives equity returns are corporate earnings growth, valuations and dividends. None of which change overnight just because a region has a good or bad year.
The US remains home to many of the world’s fastest growing, most profitable companies. Europe and the UK have their own strengths in value-oriented sectors and dividend yields. In your portfolio, we capture both.
I would probably leave your weights as they are. History suggests the region that is underperforming today often leads tomorrow, and vice versa. Staying diversified and disciplined is the best way to secure growth over the long run.
And it is that projected growth that sits inside your detailed financial plan, which we built the cashflow on the back of with our visual software package.
What we have developed together looks pretty robust, and I am confident that the investment engine driving your plan stacks up.
Simon’s Response
Simon agreed and confirmed that the model be left intact for the time being. We will of course continue to monitor the dynamics.
The Importance of a Belief System
I come back to the importance of having a belief system if you are in my shoes. Can you imagine the chaos of running an office that offers every client something totally different?
Some advisers do. They use multiple platforms, different providers, active funds, passive funds, hybrid funds, and varying kinds of other investment solutions. They may even call it diversification.
Utter madness.
Being independent is not about any of that. It is about being able to look through a wide lens, explore the entire marketplace, and come up with what you believe is the most robust and sensible solution to support those who entrust you with their future.
That is what this work is all about.
I say work, but it is not really an accurate description. For me, it has always been my way of life, who I am, and what I do.
If you would like to talk through your own portfolio dynamics, we are always happy to have that conversation.
Contact us today or call 0345 200 4041 to arrange a free 20-minute consultation.
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