The third quarter of 2026 provided a useful reminder that investment markets rarely move in a straight line. Despite geopolitical tensions, renewed inflation concerns and rising interest rates, global sharemarkets remained relatively resilient. Bond markets, however, faced a more challenging period, while the continued strength of artificial intelligence (AI) related companies highlighted an important question for investors: how diversified are our investments really?

As we look ahead to the final quarter of the year, three themes stand out: understanding bond market movements, recognising the concentration risk within passive investment strategies, and maintaining a disciplined approach to long-term investing.

1. Sharemarkets held up, but bond investors faced headwinds

Global sharemarkets generally delivered positive returns over the third quarter, supported by resilient economic growth, solid company earnings and continued investment in AI. However, performance was uneven, with a relatively small group of large technology and AI-related companies continuing to drive much of the market's strength.

Bond markets experienced a more difficult quarter. Persistent inflation pressures, higher energy prices and expectations that interest rates may remain elevated pushed bond yields higher.

Why does this matter? Bond prices and interest rates generally move in opposite directions. When market interest rates rise, existing bonds paying lower interest rates become less attractive, and their market values typically fall. This can result in negative returns from fixed interest funds, even when the underlying investments continue paying interest.

For investors holding diversified portfolios, this is an important distinction. Bonds are generally less volatile than shares and can provide income, diversification and stability, but they are not immune to short-term losses.

We recently explored this topic in more detail in our article, How can a 'safer' investment lose money?.

The longer-term outlook for bonds is not necessarily negative. Higher yields mean that new investments and maturing bonds can be reinvested at more attractive rates, potentially improving future income. The key is to understand the role fixed interest plays in a portfolio and ensure it is appropriate for the investor's timeframe and objectives.

2. The hidden concentration risk in passive investing

Passive investment strategies have many advantages. They can provide broad market exposure at a relatively low cost, and they remove the need for a manager to select individual investments in an attempt to outperform the market.

However, passive investing has a feature that deserves attention - the more a company increases in market value, the larger its weighting becomes in a market-capitalisation-weighted index.

Over recent years, the extraordinary growth of major US technology and AI-related companies has resulted in a significant concentration of market exposure in a relatively small number of businesses.

By recent estimates, the ten largest companies account for approximately 38% of the S&P 500, while the concentration is even greater in the S&P 100. Many of these companies have significant links to technology, cloud computing, semiconductors or AI.

This does not mean these are poor businesses or that their share prices must fall. Many have strong balance sheets, substantial earnings and leading market positions. AI also has the potential to transform productivity and create significant economic value.

The concern is that investors can become increasingly dependent on the fortunes of a relatively small group of companies, even when they believe they are broadly diversified.

AI investment expectations are also substantial. Companies are committing enormous sums to data centres, computing infrastructure and new AI capabilities. If the resulting earnings and cash flows justify those investments, shareholders may benefit. If expectations prove too optimistic, valuations could come under pressure.

For investors, the important question is not simply whether AI will succeed. It is whether today's share prices adequately reflect the opportunities and risks ahead.

3. Why active management still has a role

We believe active management can play an important role in addressing these challenges, particularly when markets are concentrated and economic conditions are changing.

Unlike a traditional index-tracking strategy, an active manager has the flexibility to make decisions about where and how to invest. Depending on the fund's mandate, this can include:

  • Managing concentration: reducing exposure to individual companies, sectors or investment themes where risks appear excessive.

  • Looking beyond the largest companies: identifying opportunities among smaller businesses, other regions and sectors that may receive less attention from market-capitalisation-weighted indices.

  • Responding to changing conditions: adjusting investment exposures as valuations, interest rates, company earnings and economic risks evolve.

  • Balancing risk and opportunity: holding a broader mix of investments rather than automatically increasing exposure to companies simply because their market values have risen.

Active management is not a guarantee of better returns. Some active managers will underperform their benchmarks, and their additional fees need to be justified by the value they provide. The quality of the manager, the investment process and the specific fund all matter.

The objective is not to avoid every market downturn or predict every market movement. It is to build a portfolio with appropriate diversification, sensible risk management and the flexibility to respond when investment opportunities change.

4. Staying focused on the long term

Periods of market uncertainty can tempt investors to make significant changes based on recent performance or headlines. However, reacting to every market movement can be counterproductive, particularly when it means selling investments after prices have already fallen or chasing assets that have recently performed strongly.

A well-constructed portfolio should reflect your investment timeframe, financial goals, capacity for loss and tolerance for volatility. It should also recognise that different assets serve different purposes: shares provide long-term growth potential, while fixed interest and cash can contribute income, diversification and liquidity.

The third quarter reinforced the importance of looking beyond headline returns. Strong sharemarket performance can conceal concentration risks, while weaker bond performance can reflect changing interest rate expectations rather than a fundamental failure of the underlying investments.

At Core Advice, our focus remains on helping clients build and maintain portfolios that are appropriate for their circumstances. That means looking beyond short-term market movements, understanding the risks within each investment and ensuring the overall portfolio remains aligned with your objectives.

Our message is simple: stay diversified, understand what you own and keep your long-term goals at the centre of your investment decisions.

If your situation has changed or you have any questions about your investments, please contact us to arrange a review meeting.