Since Brexit Talks British Stocks Have Lagged
It’s easy to see why people are avoiding British shares. After all, they’ve had a dismal recent run. Measured in U.S. dollars, over the past five years ending July 23, 2019, British stocks have fallen an average of almost 1 percent per year. In other words, they stink. Investors are scraping British shares off the bottoms of their shoes. They’re making choices to avoid future losses and gain a future edge.
But here’s why they shouldn’t try. In January 2008, Warren Buffett bet that a group of hedge fund managers couldn’t beat the U.S. stock market index over the following 10 years. The future was uncertain. The world was on the brink of an economic collapse. In other words, this was a bigger deal than Brexit.
Hedge fund managers should have seen that coming, right? They should have piled their money into gold to avoid the biggest market meltdown since The Great Depression. They should have stayed out of stocks for the decade that followed. But would that have been smart? Those hedge fund managers couldn’t see the future–and ten years later, Buffett won that bet.
Often, the best future returns come from the darkest place. Ken Fisher describes this well in Markets Never Forget. I believe every investor should read this book. Fisher focused on periods when investors’ hopes were lowest: after catastrophic market falls, high unemployment, high government debt and war. In each case, results didn’t turn out the way most experts thought they would. Brexit watchers might want to take heed.
Markets aren’t predictable. You shouldn’t avoid a sector because the future looks grim. But plenty of people do. And that usually costs them plenty.
Consider Tactical Asset Allocation funds. These aren’t regular mutual funds. They don’t focus on a specific sector, like large-cap European stocks or mid-sized emerging market shares. These fund managers have their fingers on the world’s economic pulse. They can buy anything… tactically moving money to find what’s supposed to soar next. They look at price trends and forecasts, while avoiding what looks grim.
However, Warren Buffett says stock market forecasters exist to make fortune-tellers look good. That also applies to anyone who adjusts a portfolio to cover a pending Brexit move. But plenty of investors still believe they can see the future. Others know they can’t– but they think they can find someone else with a working crystal ball.
Such faith springs eternal. For example, investors have $13.5 billion in the Beach Hill Total Return fund (BHTAX). It’s a Tactical Asset Allocation fund, with the managers pretending (or believing) they can see the future. Investors also have a whopping $18 billion in the PIMCO All Asset fund (PALPX).
Unfortunately, tealeaf readers might perform better. Over the past five years, measured in U.S. dollars, these two funds averaged compound annual returns of 3.45 percent and 4.71 percent respectively.
Morningstar tracks the performance of more than 300 Tactical Asset Allocation funds. Just 176 of them have 5-year track records. These are the survivors. Funds that don’t perform well usually disappear.
Over the 5-year period ending July 19, 2019, the surviving Tactical Asset Allocation funds averaged a compound annual return of just 2.94 percent, measured in U.S. dollars. Only two of them edged out the global stock market index. It averaged about 7 percent per year. None of them beat the U.S. stock market index, which averaged a compound annual return of 10.22 percent. If these experts could have seen the future, they would have loaded up on U.S. stocks. But no one can see the future.
There’s a lesson in this madness. These fund managers are trying to move investors’ money into the next big thing. They’re sidestepping investments that they think won’t do well. But nobody knows how any country’s stock market will perform over the next week, month, year or decade. That’s why it’s best not to try. Instead, build a diversified portfolio of low-cost index funds. If you’ll eventually be moving back to the UK, don’t avoid British stocks. If you own a European stock market index, don’t seek out a product that avoids UK shares. Forecasting, after all, really doesn’t work. Not recognizing that is the bane of most investors.
Model Portfolios For British Expats
|Vanguard UK FTSE 100 Stock Index||VUKE||10%||15%||20%||20%||25%|
|Vanguard UK FTSE 250 Stock Index||VMID||5%||5%||10%||15%||15%|
|Vanguard FTSE All-World ETF||VWRL||15%||25%||30%||40%||50%|
|Vanguard UK Gilt ETF||VGOV||70%||55%||40%||25%||10%|
Source: Millionaire Expat (Wiley 2018)