Take more risk. It might be good for you.

🔸 Plus: AI is good at naming whales 🔸 the Apple Watch got banned in the US 🔸 Why Gen-Z teens prefer “full-face” makeup 🔸 Hermès fortune heir has changed his will 🔸

Moneyin2 Media

Dec 19, 2023

Yesterday’s markets:

S&P 500: 4,762.64 ⬆️ 0.47%, ⬆️ 24.55% YTD
FTSE 100: 7,638.03 ⬆️ 0.31%, ⬆️ 1.11% YTD
Bitcoin: $42,141.90 ⬇️ 1.00% ⬆️ 154.04% YTD
GBP to USD: $1.2733 ⬆️ 5.33% YTD
GBP to EUR: €1.1604 ⬆️ 2.62% YTD

Risk, and why you should be taking some

For decades, a foundational piece of advice for investors has been to hold a portfolio of stocks and bonds in a 60/40 ratio, with the greater portion in stocks. The idea is that stocks will give you big gains but slow-and-steady bonds offset the scary declines that “risky” stocks go through. The returns on 60/40 mixes have historically been pretty good: 9% to11% annually over the long run.

But if you’re young — in your 20s, 30s or 40s — and you won’t need to tap your savings for years — this may not be the best advice.

In fact, the younger you are, the more you might want to consider taking on way more risk than a traditional 60/40 mix

Look at this chart (below). It shows the performance of three funds side by side:

The S&P 500 index (large international company stocks, in blue).
The NASDAQ 100 (more heavily weighted with tech company stocks, in yellow).
The Vanguard Total Bond Market Index Fund (a widely held bond fund, in aquamarine).

Ugly: Notice that the S&P 500 saw a pretty ugly decline from its peak in late 2021 to September 2022, about -24%. That’s just the sort of loss that the bonds were intended to offset.

Worse: And the NASDAQ was even worse during that period. It lost about -35% of its value —a much greater percentage than the S&P.

Bonds, meh: If you’d held a 60/40 mix with bonds you would have lost a lot less than that. So far so good. That’s what bonds do — stop you from losing all your money.

But look again at the NASDAQ line

As long as you didn’t sell, you’d still have had more money. Anyone who began investing in 2019 and kept all their money in the NASDAQ would have had a rollercoaster ride — big gains followed by big losses. But the most interesting thing about the NASDAQ is that as long as you didn’t sell, you’d still have had more money in your portfolio even at the worst part — in late 2022 — than if you owned either of the two other funds. And when the market recovered a few months later you’d be richer still. In just five years:

The NASDAQ rose 177%
The S&P gained “only” 97%
And the bonds … well, they actually lost 7%.

As we’ve told you before: absent nuclear war, stocks go up.

As long as you don’t sell during the dips, a person who wants to stay invested for more than 5 years is going to make more money by ditching the bonds and holding only stocks. And you’re going to make even more money if you hold a bunch of tech stocks, too, because tech companies can leverage their scale in a way that bricks-and-mortar companies cannot.

Be warned: this “risk” thing is real!

Do. Not. Sell. The downside of going all-stocks is that you will need nerves of steel when the markets go through one of their periodic breakdowns. This is what investment advisers are talking about when they talk about “risk” — the danger that your life savings might fall off a cliff in just a few weeks. Seeing 35% of your savings disappear will not feel good. When this happens (and it will happen): Do. Not. Sell!

Selling just locks in your losses. Instead, remind yourself of this chart — even in a down market you’re still waaaaay ahead of the folks holding bonds and probably much further ahead than people holding the “sensible” funds full of large-cap corporations.

And in a few months’ time, things will turn around and you can go back to smoking cigars and eating diamonds for breakfast.

And for dessert …

AI is very good at naming whales. Literally, it can figure out the specific whale you’re looking at.
Apple will stop selling the Apple Watch in the US. A court ruled it stole key parts of its technology from a medical device maker. The ruling doesn’t apply to Europe — yet.
Grayson Perry got a £39,000 bill from EDF. Normally his electricity and gas bill is about £300. Needless to say, the turner Prize-winning artist is unhappy.
The EU is going after Pornhub. The biggest X-rated sites will become subject to stricter age-verification rules.
Pimco warns of potential recession in the UK. Daniel Ivascyn, chief investment officer at the big bond fund manager said, “We do think there’s potentially more hard landing risks.”
Office cubicles are back! Somehow, we all got nostalgia for cubes and the vibe shifted against the open-plan desk setup.
Gen-Z teens prefer “full-face” makeup. The FT blames TikTok. “They have grown up watching tutorials about everything,” says an analyst at The Future Laboratory.
The heir to the Hermès luxury bag empire is changing his will and plans to leave £5 billion to his gardener, whom he will also adopt as his son.