Here is something you may find hard to believe: the inventor of the fantastic board game Monopoly was, in fact, an anti-monopolist!
Elizabeth Magie created a game called The Landlord's Game, which later became the classic we know and love today after Parker Brothers got a hold of it. Magie was a "Georgist" (a follower of the economic principles of Henry George) who believed in the socialist concepts that the people of a society should share equally in the economic value derived from all of the land, natural resources and other natural opportunities of the society. The intention of her game was to demonstrate the negative aspects of concentrating land in private monopolies. Somehow those intentions went by the wayside over the years, and children of all ages enjoyed being dominating capitalist landlords obsessed with bankrupting their opponents!
Here is something else you may find hard to believe: 2017 may go down as the year that "made asset allocation great again!"
Of course, we never doubt the long-term benefits of investing with a diversified asset allocation approach — but it has been a challenging belief in recent years given the domination of U.S. equities compared to other traditional asset class returns over the last five years (all data below as of December 31, 2017):
Two important observations:
- All major asset classes were up in 2017. This rarely happens. In any given year, at least one asset class stumbles and detracts from portfolio returns, while the others outperform and offset the decline. The all-in portfolio return is always somewhere in the middle between the best-performing and worst-performing asset classes. This, of course, is a fundamental feature (not a flaw) of our investment approach.
- Global equities had their best annual return in quite some time. More interestingly, foreign developed and emerging market equities outperformed U.S. equities for the first time in a long time.
While the first observation has a low probability of happening again this year, the second may reoccur in 2018. Regional equity outperformance cycles are generally multi-year affairs. We would not be surprised if U.S. equities underperform ex-U.S. equities over the next five years for one simple reason: U.S. equities are very expensive in terms of the price multiple you pay today on expected earnings growth compared to both history and the equivalent multiple for developed and emerging market equities.
So to all the die-hard capitalists out there, here’s to a happy and prosperous new year!