When looking back over the past three decades, one clear message stands out: investors who did not hold U.S. shares have missed a major opportunity for wealth creation. The S&P 500, the benchmark for the U.S. equity market, has been the strongest performer of the major asset classes typically used by Australian investors.

A $100,000 investment in the S&P 500 made 30 years ago would today be worth around $2.14 million. In contrast, the same investment in the Australian All Ordinaries Index would have grown to about $1.44 million. That is a $700,000 gap in wealth—highlighting the benefits of holding U.S. equities over the long term.

Both figures include reinvested dividends, but Australian returns do not take franking credits into account. With franking, the gap narrows, though the U.S. still dominates.

The Cyclical Nature of Markets

While U.S. equities have been the clear long-term winner, the journey has been far from smooth. There have been long stretches where they underperformed:

• From 2004 to 2018, U.S. shares lagged both the All Ordinaries and Australian listed property.

• In the aftermath of the dot-com boom, U.S. shares took 14 years to recover their peak.

• Between 1995 and 2011, there were periods when even cash deposits provided better outcomes than international equities.

Volatility has been a defining feature of U.S. equities. The index rose 57.5% in the year to June 1998, only to plunge 25.8% four years later—a swing of more than 80 percentage points. By comparison, cash returned between 0.1% and 7.8% each year, never negative, but never generating the long-term compounding growth of equities.

This reinforces that while equities can generate significant long-term wealth, they come with periods of high volatility. Investors who sell during downturns risk missing the recoveries that drive long-term gains.

The Role of the Magnificent Seven

Recent returns from the U.S. market have been heavily concentrated in a handful of companies—Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia. Over the past decade, the S&P 500 delivered annualised returns of around 17%. Excluding these seven companies, however, returns fall closer to 10–11%, much more in line with the Australian share market.

This concentration creates risk. If these companies falter, the index itself will struggle. For investors, it highlights the need to understand what is driving returns and to avoid overexposure to a small group of stocks.

The Global Picture

While the U.S. has led over 30 years, recent signs suggest that its dominance may be easing. For the year ended June 30, unhedged international equities outperformed the S&P 500, returning 18.6% compared with 17.4%.

One factor weighing on U.S. markets is uncertainty created by tariffs. Trade policy has already been feeding into higher inflation, and uncertainty around future tariffs is causing some businesses to delay investment decisions. This uncertainty is a reminder that markets move in cycles, and leadership can shift between regions.

Diversification and Rebalancing

The key lesson for investors is diversification. Every asset class has its periods of strength and weakness. Over 30 years, Australian property, cash, and international equities have all had stretches of outperformance. A diversified portfolio gives investors the best chance of capturing long-term growth while smoothing out volatility.

But diversification requires maintenance. If one asset class outperforms strongly, it can distort the balance of a portfolio. For example, a portfolio designed to hold 70% growth assets and 30% defensive assets could drift to 75/25 or higher after several years of strong equity gains. Left unchecked, this increases the risk profile of the portfolio.

Rebalancing can be done in several ways:

1. Selling down outperforming assets and reallocating into underweight asset classes.

2. Directing income and dividends into the lagging parts of the portfolio.

3. Allocating new contributions (such as superannuation contributions) into the underrepresented asset classes until the portfolio is back in balance.

Passive Investing and Market Cycles

The rise of index investing has reinforced these dynamics. Passive funds allocate more money to the largest companies in a benchmark, which amplifies trends during rallies but also increases vulnerability during downturns. While index funds have been an efficient way to gain broad market exposure, they also underline the importance of rebalancing and active diversification.

Key Takeaways for Investors

• U.S. equities have been the strongest long-term wealth creator, but they are not immune to volatility or prolonged underperformance.

• Diversification remains critical. No single asset class outperforms every year.

• Rebalancing is essential to ensure portfolios stay aligned with risk profiles.

• Concentration risk is real, particularly with the dominance of the Magnificent Seven.

• Global diversification can add resilience, particularly during periods of U.S. weakness or policy uncertainty.

The past 30 years show that staying invested, remaining diversified, and rebalancing regularly are the most reliable ways to build long-term wealth while managing risk.