Bubbles, diversification, “all that glitters is not gold…” and do you insure your house?

There is currently quite a lot of comment using the word “bubble”. This is not surprising when stocks like Nvidia, Microsoft, Amazon and AMD have done incredibly well and have massive market capitalisations. In addition to “AI” excitement and concern, there is crypto perhaps seeking to become established as a sort of digital gold. Meanwhile, real gold has now outperformed US equities this century as investors seek safe havens and real assets in a long period of money printing undermining confidence in fiat currencies. And, perhaps quietly, Chinese equities, after a long stagnation, have started to reflect that country not just being a competitive manufacturer but a leading innovator. Are there bubbles? Will trade wars restart? What can we do about any of it? Do you insure your house?

Five largest US companies - Now technology / AI related

Source: Google Images, W1M

To justify lofty valuations in some AI related stocks, there has to be extremely strong earnings growth delivery in the coming years or what goes up quickly can correct even more quickly. Massive investment has to prove to be profitable or there will be market disappointment. Having said that, there are earnings and free cash flow in the leading US technology companies in 2025 which were not there in 1999 so it is not convincing to draw a direct parallel with the “dot com” crash.  However, comments are increasing about the risk of bubbles correcting. It is easier to identify high valuations and excitement than to say when any “bubble” may crash; saying there could be corrections any time in the next couple of years is not be that helpful to investors or savers except in that it should lead people to think about their long term objectives and what kind of diversified portfolios will help them achieve those aims given we can say with certainty that asset classes will fluctuate.

Diversification

Equities: Most portfolios will say they are diversified. What matters is how they are diversified (at the security, sector, country and asset class levels), especially when sentiment changes. What’s the evidence about diversification in your “evidence-based” tracker?.  With high levels of concentration in markets (around a third of the US equity market’s capitalisation dominated by just seven stocks), we have written before about how investing in a US equity tracker with hundreds of holdings might actually leave savers more exposed to expensive stocks in a correction than an active 50 stock portfolio. We have also argued that you do not need to own all of the “Magnificent Seven” in order to get the exposure you need to AI:  Why own Nvidia when you can buy picks and shovels? If you are worried about bubbles, in the absence of crystal balls telling us when market corrections may occur, being properly diversified in portfolios designed to meet long term requirements is the best approach in our view; being active also means having the flexibility not to buy expensive stocks because they are big but to have broader exposures at more attractive valuations.

Fixed income: Bonds do not always move in the opposite direction to equities. Remember 2022?  When markets get worried about inflation and interest rates rising, then that can be taken badly by both bond and equity markets. Currently, positive sentiment towards equities is accompanied positive sentiment towards corporate bonds which has led them to trade “tight” against government bonds. Some diversification away from  equity market related risk is achieved in our fixed income portfolios by being less exposed to corporate bonds (credit) and favouring less popular government bonds which are paying attractive yields at the moment.

Historical perspective on equity bond correlation

A traditional 60/40 portfolio is not offering the 'natural' diversification it once did

Source: Bloomberg, W1M data asset 30 June 2025

Real Assets

If equities and bonds can fall together, especially when inflation is a concern to markets, then real assets are a key diversifier to have in a portfolio. On our roadshows, Luke Hyde-Smith and Thomas Pocock have been talking about absolute return and real assets, how W1M gets exposure to gold, copper, uranium, property, renewables and power generation assets. Even when thinking just about gold, you can diversify by having exposure to the metal price but also the miners who have share prices that do not fully reflect the metal price.  And being active investors, where a property company’s assets are undervalued owing to management actions, W1M is able to be an activist investor to seek value for shareholders.

The diagram below shows how US equity markets are valuing just one stock, Apple, which has market capitalisation around 50% greater than the whole energy sector and about 15x greater than the metals and mining sector. If that valuation differential is something to do with a bubble, investing in real assets gives the opportunity to diversify as well as to gain upside potential. See: Real Assets – We have lift off

Energy and mining sectors: Unloved and undervalued

Apple vs energy and mining companies - Enterprise value in $ bn

Source: FactSet, W1M data asset 30 June 2025

Protection: Do you buy house insurance?

Most people tend to spend a meaningful amount on house buildings and contents insurance in the hope of not having to use it. We pay a premium so that if the house burns down, we get financial help to rebuild. For similar reasons, W1M does not just rely on diversification but also uses proprietary Protection Strategies. When markets are going up, there is a small cost for having derivative- based positions which will pay out in the event of significant market stress, to mitigate impacts; when such events occur, it is very helpful to have some “insurance”. Being active, enables investors to do more than justify but to think proactively about capital protection.

How did it perform (Vs. Design) during Covid-19 crisis?

Actual PS performance vs S&P 500 (TR) 

*Inception: 19th April 2016. Data from 31.12.19 to 31.03.20

Source: Goldman Sachs, Bloomberg, W1M.

Figures are calculated on a total return basis, net of fees.

Conclusion:

• If there are bubbles, it is not possible to pinpoint the day they might blow up;
• What investors and savers can do is to be clear about long term objectives and have diversified portfolios to meet them;
• Active investors have more freedom to avoid high valuation / bubble risks;  we do not believe holding market cap weightings in stocks is necessarily the best diversification strategy, especially when a few stocks can dominate large indices;
• There are lots of good investment opportunities outside the “magnificent seven” for global, active investors;
• Real assets offer valuable diversification, especially at times when bonds and equities can fall together;
• “Insurance” is valuable, in the form of proprietary protection strategies, on top of diversification