The 15th century merchant Jakob Fugger, the richest man to have ever lived, can teach us a thing or two about the importance of diversifying investment portfolios.
As we enter 2024, after a tumultuous year in which geopolitical concerns dominated, wealth management strategists could do worse than look for inspiration to the example of the 15th century German merchant and cleric Jakob Fugger.
Known as ‘Fugger the Rich’, this late medieval merchant, banker and entrepreneur was in fact the richest man to have ever lived. His reputation and nickname came from following a simple investment strategy, which he championed: “Divide your fortune into four equal parts: stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of the time … whenever performance differences cause a major imbalance, re-balance your fortunes back to the four equal parts.”
But what many people don’t know about Mr Fugger is that he was one of the pioneers of a family office pursuing a diversified investment strategy. As a descendant of the Fugger merchant family, he based himself in the free Imperial City of Augsburg, as a key hub to access different cultures and territories. The family – alongside the Welsers – dominated European banking and financial services in the 16th century.
A keen student of Asian financial markets, Mr Fugger believed they would be key to expanding not just his family business, but that of the whole global trading ecosystem. Eventually, his family interests spanned a diverse range of commerce across several Empires, trading with the Habsburgs and other powerful figures including Emperor Maximilian I and King Henry VIII.
The secret to Mr Fugger’s wealth is however contained in the second part of the quote. It is not enough to have a good portfolio – you have to keep it in good shape. He had the psychological commitment to take profits from his successful Hungarian copper mines, and spread them into loans to the Vatican, into mining precious metals and into property.
But how do these medieval musings relate to today’s markets?
Fugger’s rebalancing regime
Between 1993 and 2007, the FTSE 100 returned 199 per cent – a £10,000 ($12,650) investment ended up being worth just under £30,000. Government bonds returned 170 per cent – £10,000 turned into £27,000. So what did a 50/50 portfolio, rebalanced every month return? The obvious answer is ‘halfway between the two’ – maybe £28,500?
But here, we witness the power of rebalancing. Simply taking the portfolio back to a 50/50 split at the start of each month results in a return of 196 per cent. £10,000 turned into £29,600 – only a little shy of the full equity portfolio. And the journey is a fare more pleasant one, compared to the equity-only strategy. The equity portfolio falls 46 per cent from its high at one point, while the 50/50 portfolio’s largest drawdown is 15 per cent.
So just how rich did this process of diversification make Mr Fugger? Well, by most counts, the richest man in history, when he died in 1525, was worth 2 per cent of Europe’s entire economic output – roughly $400bn in today’s money.
Diversified family finances
This whole concept of rebalancing is critical to family offices and healthy portfolios in general. But it is one that gets frequently overlooked. Unfortunately, people too often believe the recipe for investment success is to find one good opportunity and hold onto it until it peaks in value and makes them billions.
However, the real recipe to success is, like Mr Fugger, to hold a diverse range of assets, take slices of the wins and let them grow, while adding capital to the losers to give them the opportunity to flourish too. Take money from the winners, and reinvest it in the losers, and follow this approach repeatedly across a longer-term investment horizon.
This makes good investment sense, but it takes psychological commitment. Yes, it’s always rewarding to take profits, it feels like a well-done or pat on the back for our efforts. But it can feel harder to add to losing positions – we need to remind ourselves that our initial decisions were well judged.
It is vital to take time on a regular basis to rebalance and tend our portfolios. It’s not enough to sell or invest reactively or ad hoc when values go up or down. It needs to be done routinely to really deliver a nice easy recipe for success.
A family office provides a structure that ideally enables wealth to flow down through the generations. So to maintain and grow the efforts of previous cohorts, we need to diversity and commit to rebalancing over the longer term. And because of this, it is likely that some of Mr Fugger’s descendants are still benefiting from income derived from the business and wealth he built more than 500 years ago. As well as managing foundations such as the Fuggerei – one of the world’s oldest social housing projects, established in 1521 to house some of Augsburg’s vulnerable residents – they are still supporting people in need today.
When we try to determine what will be the successful investment strategy of 2024, it is worth going back in family office history and looking to the secrets of the Fugger financial fiefdom.
Ben Kumar is head of equity strategy at 7Investment Management
