In this Rule Breaker Investing podcast, David Gardner brought in some special guests to help him respond to his listeners' questions, and for this segment, it's Brian Richards from Fool International. Together, they cover a pair of queries from Ben, listening from the U.K.
First, given that diversification is viewed as a good thing in a portfolio, he asks why the Fool doesn't suggest investments in asset classes outside of stocks. And second, he contrasted the returns of the Dow Jones Industrial Average with the U.K.'s big index, the FTSE 100, and it looks like the FTSE is getting stomped. Is that really true, he wonders, and if so, what gives?
A full transcript follows the video.
This video was recorded on Feb. 28, 2018.
David Gardner: Here's Ben Stubbins' question. "Hi, David. Most professional investing advisors recommend we spread our capital across different asset classes. Now, across the Fool, I only really ever come across recommendations for equities, and occasionally properties, usually via REITs" -- real estate investment trusts. "I assume commodities and bonds are out of the scope of your services, but do you have these as allocations in your own portfolios, and if not, what's your reasoning for not including these?"
Now, that's not really what I've asked Brian Richards from Fool International to speak to. It's a more interesting question coming up. But I'll just mention, briefly that yes, Ben, I agree. We're very equity-focused here at The Motley Fool. Now, we know that our members come from all walks of life and all places around the world, and our assumption is that if you're focused enough to be doing some self-direction -- that is, you're rolling up your sleeves as a fellow individual investor and making some of these decisions yourself -- that you can understand that we're giving you the equity advice.
Maybe you have your own real estate properties that we can't speak to. There are lots of asset classes, probably only more growing with cryptocurrencies and these sorts of things. We try to speak to them some, but we are admittedly, primarily focused on equities, and that's to your next question.
You say, "I live in the U.K. and I'm member of Motley Fool Share Advisor and Motley Fool Hidden Winners. I've been gradually buying more and more U.S. companies, though, mainly prompted by the great podcasts across the Fool. U.S. companies now account for about a third of my portfolio." Again, he's writing in from the United Kingdom.
"So, I've joined Stock Advisor, as well. Lots of membership fees, but they've been worth every penny so far. My U.S. shares include MercadoLibre, Match, NVIDIA, Amazon, Alphabet, Disney." Love all these companies. "Tesla, Mastercard, Visa, Square, and PayPal, mainly because there aren't really any U.K. equivalents of these companies, and they are truly global. One thing I'm noticing," Ben says, "is that my U.S. shares seem to be significantly outperforming my U.K. shares, and if I look back at long-term charts of the Dow," versus the index they use, which is the FTSE 100, "the Dow leaves the FTSE for dust," writes Ben. By the way, in a British accent that I'm not bothering to affect this particular time. He does say, "Since 1988, the Dow has returned 1,135%" -- again, that's since 1988, so it's 30 years of returns -- "against the FTSE's 317%, according to Google Finance."
Brian, what's your take on that? Let's assume, unless you have other numbers to bring, that those numbers are generally true. That's my assumption. What do you think about that, what's going on there, and how do we roll with that with our Motley Fool U.K. services?
Brian Richards: It's a great question. I guess the first thing I would say is I don't disbelieve those numbers; however, Ben did indicate that dividends were not reinvested in those returns, and the U.K. tends to be more of a high-yield multinational-focused market...
Gardner: Ah, good point.
Richards: ... so I would say dividends being reinvested actually does matter. The second thing I would say is his time frame is since 1988, and if you think about the composition of the U.S. stock market since 1988, it almost, not quite, but almost overlaps with the rise of the internet and the top five companies in the U.S. today, by market cap, are -- I might get these wrong -- Apple, Amazon, Google or Alphabet, Microsoft, and Facebook, which are companies that either didn't exist or were, in the case of Microsoft, in their infancy in 1988. I think it had just come public or was soon going public.
And so, the returns of the U.S. market have really captured the public companies that have dominated the first wave of the internet revolution -- it's a little unfair to compare the U.S. market against that, whereas the U.K. market is focused more on commodity players and big multinationals. Ben mentioned Unilever, Shell, HSBC, British American Tobacco, etc. ARM Holdings is a notable exception, and it's talked a lot about in the U.K. It was actually a recommendation in our U.K. services for a while, before it was taken over.
Gardner: And if you don't mind, it was a recommendation of mine in Motley Fool Stock Advisor, where I recommended it probably somewhere around 2003-2004, waited on it for four or five years, sold at below cost, sort of gave up, and then it went up about 10 times in value.
Richards: Yes, exactly.
Gardner: It still hurts. In fact, I don't know if you knew that or not...
Richards: I did not know that.
Gardner: ... but by you bringing that company to this podcast angers the host. Why would you do that?
Richards: So, ARM Holdings is the exception in the U.K. market. Ben mentioned that he has about a third of his portfolio in American stocks. Actually, if he's looking at the total world stock market capitalization, it's actually underweight. The U.S. market, as of Dec. 31, 2017, represents 51% of total world stock market capitalization...
Gardner: Remarkable.
Richards: The U.K. is 6.1%. I think as a company that preaches being diversified, to our U.K. audience we recommend U.S. shares for that reason. You get things in the U.S. markets that you really can't get in the U.K. with just the breadth. There's so many public companies doing really interesting things.
We met with somebody a couple of weeks ago from the U.K., and they were saying just the advantage of the U.S. is that you've got a gigantic single market, whereas in the U.K., let's say you're a fried-chicken company. You hit it big with a store in London and you say, "OK, we're going to launch a second store in London, and a third, and a fourth." And then you're going to go to Newcastle, and you're going to go to Manchester.
Well, you're going to quickly run up against the U.K. population limitation, whereas the U.S. is 320 million people. It's very diverse. You've got many large cities, and it's a single economic, linguistic, currency, political union, and that's such an advantage that the U.S. has relative to just about any other place. Even though we think about Europe as a union, China and Japan would be the only real competitors there.
I will say one of my favorite bits of investment research is called the Credit Suisse Global Investment Returns Yearbook. The 2018 version just came out, and I actually tweeted this a little bit last week when it came out.
Gardner: I saw that, Brian. I didn't click on your tweet. I read the tweet, but is that a free resource that anybody can read?
Richards: It's a totally free resource. It's a downloadable PDF, and it looks at stock market returns across 26 or 28 developed markets around the world, and it compares the returns of stocks against bonds and against cash. And in all of the markets, stocks beat bonds, and bonds beat cash over the long term.
One of the charts I tweeted last week was about the U.K. market, in particular, and these returns are not also including inflation, but since 1955 -- so 1955 to 2017, which is much longer than Ben's time horizon -- U.K. large caps have returned 12% a year, mid caps 14%, small caps 15%, and micro caps 18%. So the U.K. market has actually been a good place for long-term-focused investors, even though it doesn't quite compare to the U.S. market since 1988 or over longer stretches.
