Monthly Newsletter – December 2023

1 December 2023

We look at how far US equities have come during 2023, but is it all companies, or just a very few!?


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Clear wishes everyone a Happy Christmas!

From Films to Finance
The Magnificent Seven was released in October 1960 originally with this somewhat confusing poster!
Here we are more than 60 years later after three sequels and one terrible remake, and the phrase everywhere.
Of course, it’s not Brynner and all that people are talking about, now it’s the seven huge US tech firms that dominate the S&P 500 index: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Dominate being the appropriate word.
The S&P 500 is up 20% so far this year. Without the Magnificent Seven riding into town the market would be down this year. The combined efforts of all the other 493 companies in the index have delivered less than nothing:This kind of concentration makes things fragile. Imagine if the safety of your village depends on just a few cowboys, you would need them to stay in town!

If after 63years you still haven’t seen the film, spoiler alert, there aren’t even seven gun slingers left by the end….

UK Business Outlook Report November 2023.

This report is produced 3 times a year, the results for the third of 2023 show the following findings:

  • The UK headline index dropped to +37% in October, signalling the softest projections for business activity in a year.
  • Non-staff costs and output prices expected to rise at the slowest rate since February 2021.
  • Strong hiring forecasts keep wage expectations near record levels.
  • Higher interest rates weigh on investment plans as Research & Development spending expected to fall.
  • Cost pressures likely to delay business sustainability targets.

An Audience of Zero

In the world of success stories, it’s easy to forget that every master was once a beginner, every superstar had moments of doubt, navigating the sea of obscurity with no goal other than doing the work. But what does it really take to start something new, what struggles will there be along the journey?
Tiger woods is one of the most renowned golfers in history, yet he would have started with an audience of zero. Although a talented child he still had to practise for hours, fine tuning his swing, mastering the course, and absorbing the defeats long before he garnered an audience or payment.
Similarly, when Lewis Capaldi, the Scottish singer-songwriter and musician, started his musical journey he wasn’t selling out stadiums or topping the charts. He started playing to empty rooms and faced rejection from multiple record labels, and would have feared never making it big, but he still showed up and played to an audience of zero.
Starting anything new, whether a business, hobby or a dream, the journey always starts at the base of a mountain. Not in front of a crowd but an audience of zero. There is always the question – is it worth it? But lessons are learnt, and characters formed along the way.
Every success story starts with the decision to try. Whether it’s Tiger picking up his first golf club or Lewis penning his first lyric, every legend starts their journey with an audience of zero, facing the same fears and uncertainties we all confront. So, the next time you stand on the brink of something new, remember you are in good company. It’s not about how you start but how you persevere and where you end up. Enjoy the journey, the destination does not exist.

No Risk Standards

What is risk?

For Theresa May it turned out there was nothing in the world riskier than running through a field of wheat…..NOT an example that resonated with the rest of the country!
In the world of finance, people spend a lot of time being far more precise about what risk is. If it can be pinned down to one number, it feels more controllable and presentable.
But it is more complicated than that. Risk measures aren’t standardised like measures of volume, distance or weight.
If ten people were asked to pour a pint of lager, fill the glass to the brim and that’s a pint. There would be ten identical pints. But, if ten people were to measure the risk of the FTSE 100, it could easily end up with ten completely different answers.
Let’s look at one of the favourite measurements of risk, volatility.

This table shows the volatility* of the FTSE 100 calculated in two different ways.

*Volatility refers to the amount of uncertainty about the size of changes in the price of an asset, usually measured by standard deviation (which we use here for the FTSE 100).
A higher volatility means that values might move around a lot in either direction. A lower volatility means that a security’s value tends to be more stable.

Source: 7IM/Factset, as of 30/10/2023

The frequency with which you measure volatility has a material difference on the outcome, as does the time chosen.
Over five years, measured daily, nearly 18% volatility, but if measured monthly over ten years its 12% – one third lower!
Strangely though, in the last column the FTSE looks a lot more volatile measured monthly from the middle of the month compared to the end of the month.
Does that mean anything? Well, it might.
If a bartender poured 10 different quantities when pouring a pint there would be chaos, also they would be breaking the law! The same is true for portfolios, if you don’t pay attention to the inputs to make sure they are consistent.

Clear Financial Advice Staff News

We are delighted to announce that Harrison Anderton is now a fully qualified paraplanner, after passing his final exam.
Well done, Harrison!

Who is Jakob Fugger?

Anyone know?  No-one?

It is the 15th century German merchant and cleric, also known as Fugger the Rich. Of course, it is!
He was given this name by following a simple strategy:
“Divide your fortune into four equal parts- stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of the time. Whenever performance differences cause a major imbalance, re-balance your fortunes back to the four equal parts.”

(As with all quotes, there’s a furiously active sub-Reddit where people argue over the legitimacy and the accuracy of the translation from 15th Century German.)

The secret to his wealth is in the second part of the quote. Its not enough to have a good portfolio, you must keep it in good shape.
He had the psychological commitment to take profits from his successful Hungarian copper mines, and spread them into loans to the Vatican, into precious metals and property.
He rebalanced.

We can see the impact by looking at the chart above where interest rates at an average of 5.35%.

Between 1993 and 2007, the FTSE 100 returned 199% – a £10,000 investment ended up being worth just under £30,000. Government bonds returned around 170% – £10,000 turned into £27,000.

A 50/50 portfolio, rebalanced every month returned halfway between the two, about £28,500.

Here you can see the power of rebalancing.
Taking the portfolio back to a 50/50 split at the start of each month results in a return of 196%! £10,000 turned into £29,600, just short of the full equity portfolio.
The equity portfolio falls 46% from its high at one point, whereas the 50/50 portfolio’s largest drawdown is 15%.This process of diversification made Fugger by most counts the richest man in history!
When he died in 1525, he was worth 2% of the whole of Europe’s economic output, which equates to roughly $400 billion in today’s money. Not a bad result from boring old diversification!

It’s never too early to get ahead of Christmas!

Christmas cards are now available, please consider buying them from Clear Minds Charity.
£5 for a pack of 10.

To order please click here





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