US Markets Risk

GazzaBloom

While US equity valuations remain high when you look across the index as a whole and for UK investors there has been a headwind of the dollar weakening against the pound over the last year, US corporate earnings remain strong as does the outlook. The US equity market returns are broadening out from the mega caps to mid and small caps. While this may cause some short term pain for holder of the US or global index so heavily dominated by the large cap tech companies, it's a good thing to see the market broadening. The US economy remains strong despite the large US government debt and the US is not alone in having a huge debt pile. The current volatility in US stocks is not untypical in the run up to the mid-term elections and things typically settle down once the election chips land.

The US mega caps tech companies may be out of favour with investors currently but discounting and avoiding these huge US based global cash generating companies completely is an active market timing bet and those who are swaying to Japan, EM, EU and the UK seeking value and joining the current momentum away from the US will have to actively monitor and time their allocations carefully and second guess global macro economics.

An unexpected black swan event could pull the rug from under everyone's feet very quickly and see the snow globe shaken up suddenly.

chiang_mai

I would not advocate a 0% allocation but a reduction from 60% or 70% to say half that number, appears to be a reasonable hedge against the current concentration risk, especially since there are so many other good alternatives anyway.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81880907#Comment_81880907

I agree. Not just now but as a permanent strategy. Within the USA tranche one can reduce the concentration of money in the mag 7 by diversifying into US small companies.

Where I would disagree with what I understand your policy to be is the frequent adjustment of the % allocations based on short term global events. Better in my view is to set up an allocation and then only review or rebalance based on long term considerations every few years.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/81880965#Comment_81880965

I personally wouldn't favour US only small caps as a means of diluting that concentration but I might favour more global small caps, of which the US was a part…..I like Ranmore for this purpose. Otherwise there's a secondary risk, given that small caps fall faster and further than any others and the whole premise here is that the US market is more risky than others at present.

Even though you and I are of a similar age, the approach I have adopted has a shorter timeline, I can't say how it might do things differently, if I was twenty years younger or had your investing knowledge and experience.

I don't know what "permanent" means when it comes to investing timelines, I posted elsewhere that the average holding time for a fund is now 4.9 years, down from 8 years in 1950. I've held most of mine for a year, which is pretty good for me. I have also preety much held my geographic allocations for about 10 months, again, that's pretty good I think.

I am unable to get behind a strategy that requires me to hold a fund for years, even though it doesn't perform the way that I want, there's not enough time left at age 75, for that luxury.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81880703#Comment_81880703

The investment association reports look at holding periods for UK investors (e.g., see Chart 58 in https://www.theia.org/sites/default/files/2023-10/Investment%20Management%20in%20the%20UK%202022-2023%20-%20Chapter%205.pdf ) with an average holding period of 3.5 years in 2022*. Chart 45 in the same document suggests that the proportion of assets under management in passive funds in the UK was about 20% in 2022.

It has been long known that investors who make frequent changes to their portfolio ('churn') will generally suffer from lower realised returns (e.g., see the morningstar 'mind the gap' series of reports) whether they are investing in index funds or not. This is why passive investors 'buy and hold' (or 'hold and sell' in retirement!) rather than chasing returns.

*The difference between 3.5 years and 4.8 years may be due to different sources or countries (who knows where AI got its numbers from).

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/81881145#Comment_81881145

The devil may be in the detail. What is meant by "frequent", are you able to loosely quantify that? I'm tempted to raise the same question regarding "generally" but it starts to appear pedantic. It would be useful to try and understand the penalty gap that exists between never changing funds, changing them once a year and changing them more often and whether that risk of change is slight or significant. The more I read about buy and hold, the more I realise that fewer people actually do it and that changing funds is common. The argument either way needs some numbers to be able to confirm the case for stick or change..

kempiejon

This thread echo'd a conversation I had around Christmas time with a pal who is only invested in a global tracker, vanguards VWRL, about the tear the Mags have been on. I have held a S&P etf for over a decade. I have decided to move half of that (less than my investment) into a global etf. Rather than take a vanilla cap weighted I have plumped for a yield bias. Vanguard's VHYL is 40% USA and negligible AI/IT software.

I know I have no idea about the future but following a discussion last weekend with an investing chum I decided no one went broke taking a profit. Although the past cannot be a predicter over about 10 years cap weighted vrs yield bias are closely matched though charges are higher.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81881179#Comment_81881179

Since the average holding time is 3.5 years for the UK, I think that is a good indication of the level of 'frequent'. The report I linked to earlier looked at cash flows into and out of funds and made the following general points:

• All six domiciles studied show a negative investor return gap over the 2018-23 period, meaning that
  investors' timing of entries and exits detracted value compared with a hypothetical buy-and-hold
  investment.
• Across asset classes, the most volatile categories and the most volatile funds within each Morningstar
  Category typically caused investors to lose more of their returns to timing of inflows and outflows.

There is a nice example (Exhibit 2) in the report where investors piled into a fund after it had had a 140% return and then had two years of negative returns.

I'm not aware of any study that has looked at the effect of different rates of portfolio churn for retail investors (there are quite a lot of studies looking at churn within funds), but that doesn't mean they aren't there! It is also the case that churn doesn't always lead to worse returns (again, there are examples in the linked report) - just most of the time.

Given that only 20% of UK assets are in index funds it may be that most people are not passive (buy and hold) investors - the evidence suggests that most people do change funds (on a 3.5 year timescale - I'm not sure whether that counts as frequent or not - it seems so to me) as they chase performance. It is interesting to note that a previously highly rated fund, Lindsell Train UK equity, halved in size between the beginning of 2024 and towards the end of 2025 as investors abandoned a fund that has not performed well in recent years.

On a personal note, the bulk of my equity portfolio has remained invested in HSBC FTSE World (or the Vanguard equivalent) and the Vanguard small caps for about a decade (those two funds comprised about 80% of my equity holdings a decade ago compared to 100% now). The changes I've made over that period have been made with a view to reducing the number of funds held as I've approached and entered into retirement (e.g., a small number, and low allocation, of active funds have been removed completely). Other changes (a swap of one index fund for another) have been a result of a change in platform.

On the fixed income side, while I continue to use the same funds (global bonds, short global bonds, and fixed rate savings accounts, although I note, for diversification purposes, I've removed an inflation linked gilt fund since my retirement income is heavily dependent on ILGs), I do actively change the weighted duration to lie somewhere between 1 and 2 years on the grounds that a) it will have very little effect, and b) it scratches an itch to do something.

coyrls

I have held some of my trackers for over 10 years but I periodically rebalance, which means that I have bought and sold portions of my holdings in these trackers. How is that accounted for in the statistics that have been quoted? Will any transaction restart the clock on how long my trackers have been held for? I suspect that it might, in which case the actual length of time that I have held a tracker for will not be captured in the these statistics.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81881036#Comment_81881036

Itr dies not make sense to me to hold only US Small Caps. I also hold European small caps. The large/small ratio is one of the overall portfolio factors I monitor against a rough target.

The strategy comes from the assumption that a crash could happen at any time and so it seems sensible to hold as wide a range of underlying investments as reasonably practicable.

Individual funds not performing in the way you want, especially in the short term, is part of investing. You cannot do anything about it except in retrospect when it is too late. What matters is the portfolio as a whole.