August 28, 2026:
It’s been another good year so far for stocks, which came roaring back after a brief panic about the Iran war. This turn of events showed once again how risky it is to trade based on geopolitical headlines.
Stocks: no longer cheap, but still worth owning
Despite the strong recent performance, many areas of the global stock market continue to be priced for good returns. Hardly anything is significantly cheap at this point. But much of the world is reasonable — and reasonably priced stocks have historically delivered very nice results for long-term investors.
The broad US stock market continues to be the high-valuation outlier. The US is a very diverse market, and some areas are priced much better than others. But in aggregate it is expensive relative to both its own history and to the rest of the world:
The US market also embeds a substantial bet that the absolutely massive AI investment boom will justify its cost. Whether that wager pays off is an open question, and one that we don’t think can be answered with any certainty. Fortunately, there are many attractive investments that don’t depend on the AI bet breaking one way or the other. We’ll have more to say about the AI boom and our approach to it in an article soon to follow.
Bonds have gone in the other direction
Bonds have not enjoyed the fun-filled year that stocks have. Yields climbed back near the top of their 5-year range (and for that matter their 20-year range!):
Source: Koyfin, 8/27/2026Since bond prices move opposite to yields, prices declined enough to essentially offset all interest income, leaving bonds roughly flat for the year. This is nothing like the disaster that befell the bond market in 2022-23, but it’s not a good performance, and even less so when compared to the exuberant stock market.
The good news for bond holders is that those higher yields translate to higher expected returns from here. This is the mirror image of stocks, where rising prices have chipped away at their potential forward returns.
Alternatives earned their keep
Alongside stocks and bonds, we own a third category of investments known as “liquid alternatives.” These investments draw their returns from different sources than stocks and bonds, so they can potentially perform well even when the major asset classes don’t.
One example of an alternative strategy is equity market neutral. This entails owning “good” (higher expected return) stocks and betting against “bad” (lower expected return) stocks, leaving net stock exposure at zero. The return depends on the performance gap between the good stocks and the bad ones. Executed well, this strategy can deliver positive returns regardless of the direction of the overall market.
Another example is trend following. This strategy buys what has been rising and sells what has been falling, taking advantage of the well-documented tendency for asset prices to exhibit momentum. It can be frustratingly choppy: long periods of nothing punctuated by short bursts of gain. But trend following has shown a long history of positive returns, along with a very valuable tendency to do well during protracted stock downturns.
Alternative strategies vary widely, but as a category they have done well this year. Since they tend to displace bonds rather than stocks in our portfolios, that has provided a nice boost, and exactly the kind of diversification benefit we hope for when we allocate to alternatives.
A narrowing return gap
We anticipate that a global, value-tilted stock allocation will outperform both bonds and alternatives in the decade ahead. But stocks’ expected returns — both in absolute terms, and relative to other assets — are lower than usual. As a result, for the first time since 2022, we’ve modestly reduced stock exposure in our managed portfolios, and increased our allocation to alternatives and bonds.
This isn’t a market timing call; we don’t know what the near term will bring. It is based on multi-year expected returns across asset classes, and on the risk and uncertainty required to get them. We think this value and risk-sensitive approach is the best way to increase our odds of finding success across a wide range of potential future outcomes.