LIfe lessons

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  By Guest Blogger Doug Rowat

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This week marked the 25th anniversary of the dot-com bubble peak.

Way back then I was a lowly runner on a big institutional sales and trading desk. And runner was an apt job description: run and get me a coffee, run and get me my dry cleaning, run and get me flowers for my wife, etc. Walking across a Bay St. trading floor carrying a bouquet of roses is a humbling work experience. Wolf whistles and kissy noises the entire way.

However, despite my lowly status, I still had a front row seat to the chaos that ensued as the dot-com bubble collapsed: salesmen yelling at analysts because of their ridiculous price targets on worthless Internet stocks, angry traders knocking over monitors because they didn’t like sea of red being reflected back at them, and on a personal level, being subjected to the kind of verbal abuse that delicate employees today could easily turn into lawsuits. It was a wild time.

As we now know, the fallout from the tech wreck ended up being horrific. The S&P 500 and Nasdaq declined for three straight years (2000-2002) with the S&P 500 not regaining its March 2000 highs until 2007 and the Nasdaq not until 2015 (!). Diversification wasn’t a popular concept for most investors back then as they’d been too busy overconcentrating on tech stocks. However, as the bubble burst only the well-diversified were spared. US, international and Canadian bonds all posted positive returns during those three S&P 500 and Nasdaq down years and while most international equity markets still didn’t do great, their downside was generally much less than the US’s.

Another potential US tech-stock crash is suddenly once again on investors’ radars, but it’s interesting how diversification is still doing its job—while the Mag 7 stocks are cratering this year, bond prices are up nearly across the board and many international equity markets are, once again, strongly outperforming.

But over the long haul, global diversification has always worked. Just ask Harvard University:

…while markets have become more correlated, they are far from being perfectly correlated. Investors can still achieve a meaningful reduction in portfolio risk without sacrificing return by being globally diversified. …over the period 1991 to 2019, individual stock markets have produced a Sharpe ratio (the ratio of the return in the market in excess of a risk-free investment over the volatility of the market) of about 38% on average. A global stock portfolio, on the other hand, has produced a Sharpe ratio of 57%. This is a very significant improvement.

Sharpe ratio (higher the number the better) is just a fancy way of answering the question: are you getting sufficiently superior returns based on the risk that you’re taking? Clearly, at least for that nearly 30-year period examined by Harvard, being globally diversified offered huge risk-reward advantages.

Naturally, we don’t yet know the full extent of how the current global trade war will affect the pricey and high-flying US tech stocks this time around, but a quick examination of the reduced economic exposure that major UK, European and emerging markets have to US exports relative to, say, Mexico or Canada, suggests that international equities could be a place to take shelter:

Distribution of merchandise export volumes 2024

Source: OECD

If you wonder why UK, European and emerging markets are sharply higher this year the above chart offers plenty of clues. And almost all major global bond indices are positive y-t-d as well.

There’s no way to perfectly hedge Trump’s trade policy because, let’s be honest, no one has any idea what he’ll do next, or for how long he’ll do it. But a good starting point is most definitely a balanced and diversified global portfolio.

I wish someone would’ve told my younger self that 25 years ago before he loaded up on tech stocks.

And maybe also told him not to carry a bouquet of roses directly across a crowded Bay St. trading floor.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/03/29/life-lessons-2/