31 Mar 2025

Investment: Change is the only certainty

Every year in December and January we are greeted by a flurry of predictions for the year ahead. Lots of large financial institutions issue long-term capital returns forecasts, and plenty of fund managers boldly predict what they think the trends for the year will be. Notably, very few commentators spend too long revisiting their predictions from a year earlier to see how accurate they were. Hardly surprising, when their successful prediction rate tends to be difficult to distinguish from luck (a coin toss even), and really what they are mostly looking for is change – something to spur potential clients to feel an urgent need to move their investments.

What is your investment philosophy and how do you stick to it?
Answers on a post-card or email me using the contact details here on our website.

John Authers of Bloomberg does a great piece each year called ‘Hindsight Capital’ where he looks back over the year at what your best investments would have been if you’d known the future from the start of the year. In 2024, it turns out that the best bets all related to knowing ahead of time that Donald Trump would win the US Presidential Election – and making various investments in line with that foresight. For example crypto trades, shorting Mexico stocks vs US stocks, and favouring US carmakers over their European counterparts. One other clear winner was a bearish outlook on China’s growth, which would lead you to buy gold (favoured by many Chinese investors and its central bank) and to short Chinese iron ore futures. More specific trades included buying the Magnificent 7 and shorting oil drilling companies; buying insurance against French credit default at the beginning of the year; denominating global investments (especially US stocks) in Brazilian reals (which took a beating in the year); buying cocoa bean futures and shorting soybeans; and shorting Chinese bonds / taking a long position on Japanese bonds – to reflect the changing macroeconomic conditions for each country.

In reality, not too many people were confident about Trump emerging victorious back in January 2024, nor could they clearly predict China’s continuing malaise (indeed I was at a conference in April where a fund manager was very happily telling me he expected Chinese stocks to surge through the rest of the year because the market was undervalued).

Change is however inevitable. Recent research found that 52% of the companies that were in the Fortune 500 in the year 2003, are no longer in that list. And that is not an isolated decade – if anything, the rise and fall of the world’s largest companies appears to be even more accelerated these days. A similar point about substantial changes over time can be made about the overall investment value of different regions of the world. In 2010 US stock exchanges made up about 41% of global stock exchange value, today that value is usually over 60%, sometimes even higher.

Humans tend to suffer recency bias – favouring what we’ve seen happening lately over a longer-term perspective. I’ve seen this first-hand, with a number of potential clients asking me if they should simply invest in the S&P 500 or even the Nasdaq. Clearly, they haven’t remembered the so-called lost decade after the original dot.com bubble in 2000, where many investors in the S&P 500 spent a decade under water before their investment values recovered (see below chart from Dimensional Fund Advisors).

Hindsight works even better over the course of decades, but since we don’t have a time machine or any investment equivalent of Biff Tannen’s Sporting Almanac, what is the reasonable course of action? Our investment philosophy at Hoe Bridge – which you can read about here on our website  – is that investors should largely follow the aggregated wisdom of market weightings as a whole. However by adopting a smart beta strategy that focuses on additional long-term returns available by tilting your investment weightings for company size, profitability and ‘value’ style – you can find a happy middle ground between the sleep-walking passivity of index funds (which keep piling into the largest companies, even though statistically their best growth is now behind them) and avoiding the high fees and Nostradamus-like qualities of active management. If you knew the future, then an actively managed fund that perfectly aligns with this would be the obvious answer. But without a crystal ball, a philosophy that seeks reasonable risk-adjusted returns seems likely to be the way to build lasting wealth over time.

If you want to discuss this more click here to get in touch
https://calendly.com/duncan-bw-hoebridgewealth/30min

NOTE: The value of your investment can go down as well as up. None of the above is financial or investment advice and you should speak to me or someone else professionally qualified to give you advice specifically tailored to your circumstances.