Change almost always comes as a surprise


“Innovations usually begin life with an attempt to solve a specific problem, but once they get into circulation, they end up triggering other changes that would have been extremely difficult to predict.”  Steven Johnson, How We Got To Now

How did the sacking of Constantinople in 1204 lead to the creation of the World Wide Web?

At the beginning of the 13th century, the Byzantine Empire was one of the most powerful in the world, until the Fourth Crusade was diverted from the Holy Land to attack and capture Constantinople.  In the wake of the fall of Constantinople, a small group of glassmakers fled Turkey and ended up in Venice – then the most important trading hub in the world – where they continued their trade, bringing additional wealth to the city. 

In 1291 the city government decided that the glassmakers could no longer stay in the city due to the fire risk posed by their furnaces. They were moved a short journey across the lagoon to the island of Murano, where the glassmakers were now rubbing shoulders with each other and, whilst on the surface they were competing for trade, the sheer density of the population meant that new ideas were spread and adopted quickly.

By the beginning of the 14th century Murano had become known as the Isle of Glass, and even today Murano glass is world renowned for its beauty and quality (it even has its own trademark).

The sharing of knowledge by these glassmakers accelerated the development of glass far more rapidly than would otherwise have been the case. The glassmakers of Murano would go on to develop clear glass and mirrors.  Their pioneering work with glass would ultimately lead to the invention of telescopes, microscopes and fibre optics – the very material from which the World Wide Web was created.

Steven Johnson’s book, quoted above, is full of stories such as this one.  The extent to which coincidence, luck and being in the right place at the right time has shaped our world is almost impossible to comprehend.  With almost every new invention, those around at the time can have had no clue as to what effect such an invention might have on future generations.

In the world of investing, many people are constantly searching for the next Apple, the next Amazon, the next new thing.  But realistically, how can we possibly know today which companies will not only still be around in the future, but will produce the new thing that changes the world? We can’t.

A recent study found that in 1965, the average tenure of a company in the S&P 500 was 33 years. By 1990 that had dropped to 20 years. It’s now 14 years. The study forecasts that, at current rates, 50% of the companies currently in the index will be replaced within the next 10 years.  ‘Creative destruction’ is accelerating.

There’s a reason why so many evidence-based investment proponents - like Stewart Partners - comment that diversification is the only free lunch. Taking big bets on which country will be the top performing in any year is a futile enough pursuit, let alone trying to second guess which individual stocks will beat the market:

Equity Returns of Developed Markets – Annual Return (%)[i]


The above table illustrates just how random returns have been. In the period covered, no developed country had the best performing market more than two years on the trot. Only two managed to be top for two years running and we’d be willing to bet few people would have chosen Finland and New Zealand as being those countries ahead of time.

It’s true that for Australian investors, a home-country bias has often paid handsome dividends. But, for most people, ‘your total investment horizon’ could be as long as 50 years (or even potentially forever if you plan for your wealth to cascade to future generations). None of the following existed 50 years ago:

·       The Internet

·       Personal computers

·       Mobile phones

·       MRI scanners

·       Heart transplants

·       Functioning prosthetic limbs

·       Compact discs (and already almost obsolete)

·       Post-It notes

·       Digital cameras (also now largely replaced by smartphone cameras)

·       3D printers

Technology advances at such a rapid pace nowadays it’s virtually guaranteed that many of the inventions of the last 50 years will be superseded far faster than earlier inventions were.

The above advances didn’t all happen in one country. Who knows where the inventions of the future will originate? Despite its detractors, globalisation is a thing. As emerging countries continue to develop, innovations of the future could come from virtually anywhere on the globe.

Which is why a low-cost, globally diversified portfolio increases your chances of having a successful investing experience because you’ve broadened your investment universe.  The alternative – taking bets on your home country, or a small sub-set of global markets – increases your risk and decreases your investment opportunities.

We often see people with only Australian shares in their portfolio – and typically far fewer holdings than even the ASX 300 index includes.  We prefer a global portfolio with over 8,000 underlying holdings:


In a popular children's story, young Charlie pins all his hopes on finding one of a handful of 'golden tickets' hidden among millions of candy bars. It seems many people approach investing the same way.

It's a haphazard approach, reliant on chance and requiring a lot of work that is unlikely to be rewarded. Worse, it means taking unnecessary risks by tying one's fortunes to a handful of securities or to one or two sectors.

It's true that you can get lucky the other way, like the boy in the chocolate factory story. But the chances are against you.  In the world’s largest and deepest market – the US - the market’s pricing power working against fund managers who try to outperform through stock picking or market timing is evidenced by only 14% of US equity funds and 13% of fixed interest funds surviving and outperforming their benchmarks over the past 15 years.

US-Based Mutual Fund Performance, 2003–2017[ii]


In contrast, sound investment starts with identifying the risks worth taking and minimising the risks that don't come with an expected reward. You can reduce risk and increase flexibility by diversifying.



Author: Rick Walker with thanks to:

“Change almost always comes as a surprise” by Carloyn Gowen, 20 November 2018 posted at

The Golden Ticket Trap by Jim Parker, 24 January 2014

[i] In Australian dollars. Source: MSCI country indices (net dividends) for each country listed. Does not include Israel, which MSCI classified as an emerging market prior to May 2010. MSCI data © MSCI 2018, all rights reserved. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

[ii] The funds referred to are US mutual funds which are not registered as managed investment schemes with the Australian Securities and Investments Commission and as such these funds are not currently available to New Zealand and Australian investors. The sample includes funds at the beginning of the 15-year period ending 31 December, 2017. Each fund is evaluated relative to the Morningstar index assigned to the fund’s category at the start of the evaluation period. So, if, for example, a fund changes from Large Value to Large Growth during the evaluation period, then its return will still be compared to the Large Value category index. Surviving funds are those with return observations for every month of the sample period. Winner funds are those that survived and whose cumulative net return over the period exceeded that of their respective Morningstar category index. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. Fixed interest fund sample includes the Morningstar historical categories: Corporate Bond, High Yield Bond, Inflation-Protected Bond, Intermediate Government, Intermediate-Term Bond, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond, and World Bond. See Dimensional’s “US Mutual Fund Landscape 2018” for more detail. Index data provided by Bloomberg Barclays, MSCI, Russell, FTSE Fixed Interest LLC, and S&P. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2018, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed interest indices © 2018 FTSE Fixed Interest LLC. All rights reserved. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. 

Rick Walker