We have started to receive questions from clients about whether their portfolios are over exposed to a handful of US listed companies. This understandable as there has been so much written in the financial press on this subject recently.
There is of course something to write about. NVidia has recently been valued as high as $5trillion. That means that this one company is worth more than the entire UK stockmarket. NVidia is only one of the group of seven company shares called ‘The Magnificent Seven’ and together they make up over a third of the US market the S&P500.
The problem with the question though is if you want to tilt away from these large companies (which we can do for client), what do you buy in their place.
The issue with not buying all shares in the global stock market is that most people misunderstand where the growth comes from. The common assumption is that if the global market goes up by 10% in a year, that it is evenly spread across all company share prices. Like the rising tide lifting all boats.
The reality is very different though. Since 1929 nearly all of the returns from shares have come from just 4% of companies. That is a tiny portion of the market. 60% of companies have lost money and the rest have just returned the money you invested into them. The great new is that this 4% made so much money for investors that it made up for the other 96%.
This is the problem for clients, if you believe the financial press then you have to make a choice about what to invest in (and even harder what not to invest in). If you miss some or all of the 4%, then you can turn a very good investment return into a loss.
It is the same issue for professional investors such as active fund managers. The poor returns from some of the big active investment houses and wealth managers in the last decade are simple a result of not owning enough of or any of the Magnificent Seven. The rest of the S&P500 (the S&P493 in essence) has been flat.
There is always a credible story to be told about why it doesn’t make sense to invest in the whole market. Why one company is going to outperform another. In reality the data shows that the best way to make money is to own the market and ignore the fluctuations.
If you are interested in hearing even more on this subject then you could do worse than to listen to this podcast from Timeline one of the investment managers that we use.
We are holding the hands of many clients through these interesting times, from our office in Hook, Hampshire and throughout the UK.