Back To The Future When Seeking The Best Investments

Investors looking for profits face a bewildering array of investment opportunities to build a portfolio but making a decision about where to put that hard-earned cash is not always easy.

Research from the London Business School has looked at what makes the perfect portfolio and, looking at past performances, how those assets are likely to perform in the near future.

One issue for investors is the days of big yields seen between 1982 and 2000 are long gone and they will have to settle for smaller returns.

Researchers say markets will still fluctuate and some sectors will perform better than others.

That much everyone knew, but the researchers have calculated investment returns across 20 countries going back to 1900.

Recipe for investment success

In that time they discovered that bonds brought a marginally positive return, index-linked bonds fared slightly worse, describing them as ‘zero to marginally negative’.

Holding cash over the same period was the worst tactic for an investor, since the return was also marginally negative.

Equities, on the other hand, registered a return of between 3% and 3.5%.

The work of the business school has been underlined by several other consultancies, which all found similar results.

One of them, the Macro Research Board, used the exercise to determine how an investor should balance their portfolio.

They came up with this formula: 50% global equities; 35% government 10-year bonds; 10% in global commodities and 5% cash.

By doing so, an investor should see returns over the next 10 years of between 3.6% and 5.6%, if held in Sterling.

Bail out of bonds

For a portfolio held in Euros the performance is slighter better at between 4.1% and 5.7%, while the dollar returns would be 3.4% and 5.4%.

The bottom line for all investors is that historical performance shows little optimism for higher returns in the future.

However, and this is a real possibility, the only scenario that would bring higher returns is if the leading economies of the world entered a phase of deflation which would see the value of equities rocket as a result.

If this should happen, investors should bail out of government bonds and into equities, since bonds are usually held to protect against low yields.

Though it should be said that the current prevalent economic policies has seen yields on many asset classes fall to historic lows, and when inflation is taken into account the likelihood of above average returns on their assets is remote.

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