The end of the perpetual-motion market?

Are we witnessing the demise of the everyone-does-nothing investment model?

For centuries inventors have dreamt of the perpetual-motion machine; a contraption that runs forever with no external power source. The prize is endless free energy for zero effort.

The investment world has been chasing a similar dream. But instead of energy, our prize is an endless supply of high returns for zero effort: A perpetual-motion portfolio.

Sadly, the perpetual-motion machine remains an impossible dream — the laws of physics forbid it. But for fifteen years many investors have enjoyed something close to the perpetual-motion portfolio; a reliable stream of high returns with no input required on their part.

That perpetual portfolio is the index tracker. For UK investors, one decision — to buy the Vanguard Global Tracker — has earned them an inflation-dwarfing 11% a year since 2010, turning £10k into £49.4k, and all with no further decisions (or effort) required. For American investors it’s been even simpler — tracking your home market has yielded better results.

For UK investors, doing nothing other than buying a global index tracker has produced a relaible stream of great returns — can it do this forever?

Is this the real deal; a genuine perpetual-motion portfolio? Can its holders sit back and watch it repeat this feat for the rest of their investing lives?

My suspicion is that it can’t, and that — more pertinently — it might have already stopped.

Why?

Let’s return to the Wallace-and-Gromitesque world of perpetual-motion machines: There have been claims of success down the years, but these only worked because of an external power source, like wind or sunshine.

However, using an external source of energy means they’re not ‘perpetual’: If you take it away, then, like solar panels on a cloudy day, the machine stops working.

So let’s ask the same question of the industry’s current perpetual-motion portfolio: Is there an external source of energy that, if it went AWOL, would stop the global tracker from working?

It’s not a crazy thing to consider. In fact, this is exactly what happened with government bonds. Buying a gilt tracker in 2005 earned you a tidy 6% a year for the next 15 years, turning £10k into £23k. This felt perpetual to many at the time, and bonds were duly bricked into multi-asset portfolios and advisers’ client offerings.

Government bonds (giltsa in the UK, Treasuries in the US) were viewed as perpetual performers for a long time.

But this wasn’t a perpetual-motion portfolio. It was powered by an external source: a combination of falling inflation, zero interest rates, and QE. And since 2020, when that power source was withdrawn, gilts have lost -6% a year, cutting that £23k back down to £17k. This caused serious problems for many investors, particularly those close to retirement.

Gilts (and US Treasuries) turned out not to be perpetual performers when conditions changed, causing much financial pain for their (usually more cautious) holders.

Could the same thing happen to the global equity tracker? Has it been boosted by something that could disappear?

I think it has: Specifically its exposure to US equities and the dollar, both of which look like they’ve over delivered. By which I mean that US equities look expensive, and the tracker is more relaint on them (74% of it is now invested in the US, in 2010 it was 49%). This has created the risk that, like bonds after 2020, their holders will have to give some back.

But maybe this is what always happens? Don’t US equities and the dollar always win?

Well, if your timeframe’s long enough, then maybe. But I bet your timeframe isn’t long enough. Because when it reverses it can last a long time.

Witness the noughties. This was the last time a period of American exceptionalism went into reverse, and neither US equities nor the dollar made money for British investors:

For the whole of the 00s decade, British investors made no money from investing in a global tracker.

Put simply; if you’d invested in a global tracker in 2000, then — ten years later — you still wouldn’t have made a single penny from your decision. I don’t know many people with patience that long.

This is the risk I’m warning of: a decision that, at the time, looked like a no-brainer causing you to suffer a lost decade.

It’s the no-brainer part that’s the problem. If we are moving into a decade like the noughties, then we’re facing a some-brainer: Because if the everyone-do-nothing model stops working, someone, somewhere will need to start making investment decisions.

Those decisions don’t look particularly hard, by the way. Outside of the US mega caps that dominate the tracker, valuations look fine. You’ll just have to do something to access them.

Worryingly, if you’re on the do-nothing investment model, there are signs that the tide has already turned. American political events have caused institutional investors’ view to sour faster than milk on a hot day, and they’ve withdrawn some of their capital. This has caused US equities to underperform this year, dragging the global tracker down (while other regions have made good money).

Market performance this year looks a lot more like it did in the 00s than the last 15 years.

It’s not ridiculous to worry that this poor performance might cause the US outlook to sour further, leading to further outflows and further poor performance. It looks to me, in other words, like a negative feedback loop is forming; and once they get going they’re hard to stop.

To be clear, I’m not suggesting this is the end of passive. It’s just that passive investors may have to be more active in their choice of which passive funds they use, and when they use them (I just hope the universe can survive this paradox).

Unfortunately, this is a hard thing to do. I’ve never met an investor who’s excelled over the long term by jumping into or out of market trackers, and I doubt I ever will.

But I’ve met plenty who’ve excelled by picking stocks. And, to the surprise of no one, this is my favoured way of addressing this problem. Here’s an example of how that can look:

After a tough run in the late 90s, when underperformance and investor redemptions put his job at threat, Neil Woodford’s stubbornly active approach to equity investing came into its own in the 00s.

Am I claiming classic active management is the real perpetual-motion portfolio, then?

No. As the deliberately selected example of Woodford demonstrates, active funds are also powered by an external source: manager skill. And this can disappear too. Maybe that’s literally, by the manager quitting, or in other ways; like the fund growing too large, the manager losing their edge, or C-suite interference from on high (to name but a few).

I solve this problem by rotating away from past-their-peak managers to those in their sweet spot, which is why I’m (secretly-not-secretly) pleased markets are moving my way. However, this clearly doesn’t qualify as perpetual either; as my returns are powered by my own decisions, not by something that happens automatically. So if I do perform well, I’ll only keep doing so as long as I’m on the ball.

In the end there’s simply no escaping it: Just as the laws of physics forbid a perpetual-motion machine, the laws of finance rule out a perpetual-motion portfolio.

So, if you’ve enjoyed the free ride for the last 15 years — well done. But it may be time to either start making some decisions, or to consider finding someone to make them for you. Because, for the first time in a long time, doing nothing might mean getting nothing too.

Everything written here is my personal opinion only and should not be taken as investment advice. Past performance is not a reliable indicator of future returns.

This first appeared as a column in Citywire in June 2025.