Stocks have declined 5% in August. The main reason is interest rates. The US 10-year rate has increased from 4.0% to 4.3%, setting a new post-financial crisis high.
The 10-year yield may increase to 4.75% from here.
These increased yields have made investing in bonds more attractive. Investors can now earn 2% a year after inflation, risk free, by investing in US government inflation-protected securities (TIPS, $TIP).
For risk-averse investors, this is a good return and it beats the expected return from large-cap US stocks.
If an investor seeks returns above 2% after inflation, then the best bet, according to Research Affiliates (see the link above), is non-US stocks. Developed market stocks outside the US are expected to return 6-7% a year after inflation, emerging markets stocks 8%.
Our portfolio, which is mostly invested in non-US stocks, should be able to return 10%+ a year in nominal terms over the coming decade, we believe.
Investors are currently spoilt for choice. After increases in interest rates, bonds have become a decent choice for risk-averse investors, while non-US stock markets offer higher returns for those willing to take on more risk. The only losers of this decade, we believe, will be those clinging onto expensive Technology shares.
Volkswagen was sold, Shell bought.