If you were an ordinary investor looking to grow your wealth, one of the best (and easiest) bets was to follow Warren Buffett’s famous 90/10 strategy. It’s simplicity itself: put 90% of your capital into a low-cost S&P 500 index fund and invest the rest in short-term US government bonds. Then kick back, relax and watch your money grow, with the 10% providing a cushion of liquidity if you need it during a downturn.

The strategy is, perhaps, as much a dig at professional money managers by the Oracle of Omaha as it an expression of concern for the retail investor. Buffett has repeatedly expressed doubt about professionals’ ability to beat the market. Index funds get you professional-grade results without the management fees, the argument goes.

It also reveals an implacable confidence in the US market. As an index of top US equities, the S&P 500 is an investment in America.

From concentration towards real diversification?

On paper, an index of the 500 leading companies represents a broad swathe of the country’s economy. In practice, by 2024 the ‘Magnificent Seven’ tech stocks comprised more than a third of the value of the entire index. Investing in the S&P 500, practically speaking, meant exposure to American tech stocks.

For non-US investors, American equities also conferred the benefit of a strong US dollar.

This has been a winning gameplan. As Goldman Sachs Research’s Chief Global Equity Strategist Peter Oppenheimer explains in a recent interview: “There are two general rules of investment. One is that diversification tends to help improve risk-adjusted returns. But actually, for a long time, that wasn’t true because you continued to see the same trends outperforming. You didn’t really need to diversify.”

But Oppenheimer says we may now need to pay attention to the second general rule, mean reversion. As Oppenheimer puts it (emphasis our own):

“We had this consistent rise in profit margins in the US in technology companies, but we think now you are beginning to see more mean reversion from high levels of profitability in some areas. This again suggests that having a broader range of assets and looking at specific company opportunities irrespective of geography or sector, becomes more interesting for investors.”

Add to this the lower value of the dollar and the promise of stronger growth in other areas, and the incentive to invest in other markets, as well as in single stocks or specific sectors around the world, increases.

The power of choice

In the current bearish environment of potential slowing global growth, increased political risk and market uncertainty, sophisticated investors naturally want flexibility, reliable execution and access to a diverse array of assets and markets.

At the same time, brokers may see an increasing appetite from the clients for broader geographic reach and access to a wider variety of assets.

Many ordinary investors may increasingly want exposure to euro, JPY, CHF-denominated assets or emerging market equities, as well as the option of gold and crypto as a potential hedge against dollar devaluation.

For retail brokers, providing the means to effectively diversify your portfolio – by sector, geography and asset class – could increasingly become a significant competitive advantage.

The world’s markets in your hands

Finalto is a leading multi-asset liquidity provider for professional clients. Our expertise, technology and global presence put the world’s markets in your hands.

We offer thousands of instruments over multiple asset classes and our liquidity management team and in-house developed analytical algorithms enable us to provide you with tight spreads and exceptional execution quality.

Whether you’re a hedge fund, family office, or prop house looking to diversify your exposure, or a retail broker seeking to offer a broader range of assets, our customised liquidity solutions give you flexibility and choice.

Contact Finalto to learn more about our award-winning liquidity, risk and fintech offerings.

All opinions, news, research, analysis, prices or other information is provided as general market commentary and not as investment advice and all potential results discussed are not guaranteed to be achieved. The information may have been derived from publicly available sources, company reports, personal research, or surveys. Past performance is not indicative of future performance. Trading carries risk of capital loss. Service available to professional clients only.