It is the time of year when everyone predicts the future. Over the past two weeks Trustnet has been filled with prognostications and predictions for the year ahead, both through fund ideas and market outlooks for the coming 12 months.
But one chart caught my eye this week from Montanaro that is worth highlighting as a good indicator of how variable and fickle investing can be.
Below, it shows the top performing assts in each of the past seven calendar years. Last year – as you may be tired of reading by now – large-cap global equities dominated thanks to the rise of the ‘Magnificent Seven’.
Global high yield bonds were close behind, with a 14% gain, according to the data, followed by smaller companies, mid-caps and gold.
But looking across the entire seven years shows that there can be no rhyme or reason and what works one year may not necessarily work in the following 12 months.
Few would have predicted the 61% rise in oil in 2021, or the commodities boom (up 30%) in 2022. Similarly, it would have been a brave investor to predict gold as the top performing asset in 2018 and 2020.
For those that wish to make such bold claims, the table shows it largely pays to take big swings on periphery asset classes. For the contrarians, 2024 was a down year for commodities and oil. Could they bounce back in 2024?
The risk with this strategy however is that if investors time it wrong it can be a disaster. Indeed, while oil has topped the tables in two years (and was second in another), it has also been bottom in three years. And there is no guarantee that a poor year will be backed up by a rebound – oil did not fare brilliantly in 2017 before propping up the table in 2018.
Source: Montanaro Asset Management
Perhaps a more appropriate strategy is to stick with the assets that are perennially in the middle of the pack, such as global large- and mid-cap equities as well as high yield bonds. Although the highs are perhaps not as rewarding, the lows are also more muted. There is again no guarantee that this will work all the time.
Lastly, there is the diversification strategy – having a bit of everything in the understanding that you will catch both the upside and the downside, but will benefit if the biggest winners are ahead of the largest losers. However, this does not mean investors can put cash away and forget about it.
Even here, they will need to be active, making sure they are rebalancing their strategies appropriately when assets rise so as to make sure they maximise their returns.
This last option also requires some market timing, but at least the results are less severe if caught out by market swings.
Of course, it is rarely a good idea to invest on a one-year view and many recommend taking a long-term approach with a mindset of putting cash away for at least three years.
But there are myriad reasons why investors may need to update their portfolios, whether it be short-term news, fund manager changes, portfolio style drift or just simple rebalancing.
However you invest in 2024, we wish you the best of luck and a prosperous year ahead.