Beware Following the Herd
There has been a lot of talk about the HUGE ‘Tech’ rally recently – especially in the US – and many investors have jumped into US Tech stocks or associated ‘Trackers’ (eg S&P or Nasdaq) on the back of this rally. But how about the poor, unloved UK equity market? Just take it out the back and shoot it, right?
Written by Jonathan Wade
Director
I mean, look at this year:
· NASDAQ (US! Tech! AI! Woo!) is up 24%
· FTSE 100 (UK! Oil! Banks! Boo!) is up just 7%
But, as always with investment, memories are short and there is a twist.
Despite this year, despite Nvidia, and despite AI, over the last three years, the FTSE 100 has beaten the NASDAQ.
Yes, if you’d have put £100 in the FTSE 100 three years ago, you’d now have £127. In the NASDAQ, it would be £122.
Source: FactSet/7IM, total returns. Past performance is not a guide to future returns.
This lovely, underappreciated and counter-intuitive fact gives us the chance to mention one of our favourite investment points.
Depending on your investment term, losses matter.
If you held the NASDAQ, you would have had a WILD ride. You’d have been underwater until January 2024!!! (Assuming you’d stayed invested). And why?
Fat Tails.
The chart below counts the number of days where the two markets moved by various amounts.
The far left and the far right are the “tails” – the extreme values. And there are a lot more of them in the NASDAQ? Those are the “fat tails”.
And while it’s great to have a load of big UP days, it’s only good if you don’t have a load of big DOWN days too.
Source: FactSet/7IM
Percentages are cruel: A 50% loss needs a 100% gain to get back to your starting point! And it happens at a small scale too. If your investment loses 5%, and then makes 5%, you end up with less than you started with.
So, the FTSE 100 wins by being a lot skinnier than the NASDAQ; having lots more boring, small positive days, and far less really bad days.
Moral of the story is that whilst it is always tempting to jump onto the latest much-publicised market rally, it is also important to have some ‘balance’, or diversification, in your portfolio, to give you some nice exposure to those good days, whilst also giving you some protection against those bad days.
As always, we are happy to have a chat so feel free to get in touch.
Source: 7IM