The chart I’m about to show you tells you just about all you need to know about long-term investing. It may look a little complicated at first sight. But don’t worry, that’s the beauty of it!
Top asset classes over the last ten years
(Click on the chart for a larger version)
Source: Lipper Hindsight
What on earth does this cornucopia of colour mean?
Well, this fascinating chart shows the performance over the last ten years of the nine main asset classes. The best performers of each year are at the top – and the worst at the bottom. What’s striking is the inconsistency of it all.
For instance, in my mind’s eye, I’d have had UK property (green box) pretty much near the leader-board up until the great credit crunch. But it wasn’t. In 2003 and 2005 UK property was way under par. And just look at commodities (yellow) – from hero to zero and back to hero throughout the last decade.
Most investors’ favoured asset class, UK equities (blue) have had a pretty chequered 10 years too. To be honest, the only relatively consistent performer was emerging markets (grey box) which held the number one slot for five out of the ten years. But then again it hit the bottom spot twice, too – falling by a horrifying 40% in 2008.
But the important thing this chart shows is that you don’t have a clue what the markets are going to throw at you from one year to the next. Yet we’re constantly told that asset allocation is the most important thing we can do for your portfolios. And to an extent that’s true. But guessing what the market will throw at you is clearly a tricky affair.
I guess we all have our own ideas about how the different asset classes will perform. I certainly do. But then I try to fight the urge telling me to change my portfolio accordingly. My heart may tell me to pump it all on gold – yet my brain says "no!". My heart says dump equities, but again, it’s overruled.
And fighting my urges (or investment bias) is nearly always the right thing to do. Keep a diversified portfolio at all times. The chart shows that you don’t have a clue which assets will do best over the coming year.
Sure, you can go ‘over-weight’ your favourite classes, and ‘under-weight’ the ones you don’t like. But always maintain a position.
An exclusive report from The Right Side
My heart was wrong about equities
As spring 2009 rolled on, everything seemed to be going wrong for equities. We were still in a deadly spiral of doom. Wealth was crushed, people felt poorer, so nobody was spending on anything but essentials. Businesses were thus crushed, and stock markets continued to tank.
It was hard to see how things were going to change.
It would have been easy to capitulate and chuck in the towel on equities (and I suspect many did). But if you held your equity position, you were treated to a monster 30% rally by the time 2009 came to an end.
And here’s the thing. Today, my heart is again telling me to dump equities. Every time the euro-saga hits the headlines (and that’s pretty darned often), the markets take a plunge. And given that not only is the euro-saga likely to go on for some time, but the rest of the West has similar structural issues, then I think we can expect some torrid times to come. My heart says dump, dump, dump.
But I am not dumping equities. Sure, with a 25% position, I’m under-weight, but I’m keeping my position.
The chart tells me I have to. I cannot possibly know how this crisis (and the next one!) will play out. Who knows, it may even be good for equities.
It’s certainly not all doom and gloom for UK shares. Data released by Capita Registrars on Monday revealed that UK companies will pay out a whopping 27% more dividends this year.
Now that’s not a figure that tallies with such a feeble looking FTSE! And it should bode well for you if you’re following Stephen Bland’s simple but very effective 'extra income cheque' strategy. (Not heard about this? Check it out here.)
I’m also still keen on my UK Dividend Plus ETF (exchange traded fund), it offers you a cost effective way of getting exposure to the FTSE 350’s top 50 dividend payers. It’s currently yielding 5.9% - that’s a handy income. And who knows, maybe UK equities will take us by surprise and offer us a handy capital gain, too.
But the bottom line ‘take away’ point from today’s issue – as displayed by that multi-coloured chart at the start - is that it pays to stay diversified and stay safe. Let me know what you think.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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