Standing The Test of Time
Key Takeaways
In the past 500 years, the world has seen the rise and fall of several global superpowers. The incumbent generally controls trade, and has an overriding influence over financial flows including controlling the reserve currency.
In order to keep up to date with the latest global developments, your investment portfolio should be constantly and consistently rebalanced to the latest accurate representation of what the world’s investible market is. After all, a globally diversified strategy in the 1900s and today is very different.
Avoid becoming too attached to any single investment or way of investing and structure your portfolio in a way that caters to new entrants or disruptions to the world economy over time.
Investing is not about predicting the future; it's about preparing for it.
We have written about investing for the long-term quite a number of times before. We have learnt that in order to hit our investment goals and targets, and to at least ensure a positive outcome, we have to put money to work for at least ten years or more.
When it comes to long-term investing, one of the real issues is that unless you implement it in a systematic way, there is a decent chance that what you initially invested in could be rendered outdated or obsolete as the years roll on.
This brings about an important aspect of slow-moving but large impact economic cycles. When we think of cycles, what springs to mind are the normal up and down growth/recession cycle. For example, the last big recession we experienced happened in 2008, with small blips in growth in between. We may be on the verge of a possible recession sometime in the future too.
These are the sort of cycles we’re used to and, in investment and financial planning, they’re the sort of cycles that many solely focus on when thinking about risk. However, when we are setting out investment plans meant to last decades and creating multi-generational wealth transfer and income generation, how do we ensure that the portfolios remain as relevant 30, 50, or 70 years down the road as they are today?
As an example, in the 1600s when the Dutch economy was the largest in the world, the largest market capitalisation in the stock market was naturally, a Dutch company: namely the Dutch East India Company (VOC). It was a huge conglomerate which was set up as a trading company meant to access the Asian spice trade. It grew to be a huge entity, with its own ability to wage war, imprison and execute convicts, negotiate treaties, strike its own coins, and establish colonies. It was also the pioneer in many financial innovations at the time, creating the stock and bond market, and also derivatives such as futures and options. It was no surprise that its share price rose significantly during this period of corporate dominance (shown in the chart below). It could be considered as the pre-eminent blue-chip company in its time.
Although its domination lasted for over 150 years, it eventually declined and went defunct in 1796. The decline of VOC and consequently the decline of the Dutch economy led to a change in the world’s financial power. The chart below illustrates these slow-moving changes in economic leadership.
Source: Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail, Ray Dalio, Simon & Schuster, Nov 2021.
China was the leader in the 1500s, followed by the Dutch in the 1600s, the UK in the 1800s and for the past 100 odd years, the US has been the incumbent superpower of the world. The world has also seen the shift in global reserve currencies from the Guilder in the 1600s, to the Pound in the 1800s, and now to the US Dollar.
For the people living in 1700, it would probably have been unthinkable that they would use any other currency or invest in any other stock market apart from Amsterdam’s. These cycles are extremely hard to forecast and estimate as they don’t occur in a regular rhythm and it’s hard to pinpoint exact causal factors. So could we be using the Chinese Yuan in the next 10 to 20 years? We really don’t know.
So how do we ensure that we cater for these possible seismic shifts in the world when mapping out investment plans and strategies that are meant to last for a very long time? For example, a globally diversified strategy in 1900 would have a very different allocation from a globally diversified portfolio of a modern-day investor (chart below).
In order to capture the US’s rise over time and not be stuck holding increasingly lower value UK assets, there would be a need for your investment portfolio to constantly and consistently rebalance to the latest accurate representation of what the world’s investible market is.
Over time, your allocation should look something like the graphic below. In this manner, if there are new entrants or disruptions to the world economy over time, you can rest assured that your portfolio keeps abreast of the latest developments.
Sources: Elroy Dimson, Paul Marsh and Mike Staunton, DMS Database 2023, Morningstar, and FTSE Russell All-World Index Series weights (recent years).
In order to overcome these changes, you must first acknowledge that nothing lasts forever — not even the largest, most entrenched company or economy. There will always be upcoming entrants aiming to innovate and overtake the incumbent.
As investors, we must avoid becoming too attached to any single investment or way of investing. That great performing strategy, champion fund, and the old adage of holding on to blue-chips for the long term will not work all the time and can eventually become outdated.
Source: The Business Times, 22 May 1996, NLB eresources.
The picture above is a snapshot from The Business Times in 1996. It shows the prices of some of the stocks listed on the Singapore market. You may pick out some well known blue chips like SIA, SPH, Singapore Technologies, Sembcorp and Singtel. Had you invested in these SG market giants at the time, even considering dividends over the years, your investments would not even have kept pace with inflation, with current prices well below the 27 year old prices. Some counters have also disappeared over the years — either through delistings, buyouts, or mergers.
Our core investment strategies cater for these shifts — the VaR and Everest series are allocated and managed in a way to ensure that they keep up with the latest changes and developments in the investment landscape. This helps clients not only achieve verifiable risk and return statistics, but ensures that their portfolios stand the test of time.
If you want to find out more about how to build such an investment strategy or whether you are allocated in the right way, come and chat with us.
