Investing offers no yellow brick road to riches – and new research by an investment firm reveals while diversifying is vital.
The anecdotal belief is equities offer the best return over the long term, so Schroders and Barclays looked at the figures going back 116 years to test the theory.
Equities in the UK certainly delivered a 5% over more than a century, while gilts only returned 1.3%.
But the big surprise was no investment class was top of the pile for long.
The five most popular investments – equities, commodities, gilts, property and cash – all regularly switched places.
The table below shows how each class performed over the past 13 years.
Equities come out on top
Scoring five points for top placing, four for second and down to one for fifth, the rankings look like this:
- Equities 51 points
- Property 49 points
- Gilts 37 points
- Cash 29 points
- Commodities 28 points
While investors want to make money, not losing any is just as important, says Schroders.
“Diversifying mitigates risk,” said the firm’s David Brett. “The table shows that anyone investing in commodities over the 13 years would have a return of 0.6%, but would have seen that go up to 15% between 2003 and 2007 but down to a loss of 3% from 2003 until 2016.
“But the return for splitting the investment stake equally across all five assets would have shown a return of 5.1%.
“Don’t only look at the five asset classes, but diversify geographically as well as a market in one country can show a profit while one in another country could show a loss.
Another point to watch is keeping assets liquid – commercial property is notoriously difficult to sell and several funds in the UK have blocked investors from withdrawing their cash.
Diversification is a balancing act. Although no rules suggest how many assets offer the best results, fund managers do suggest too many holdings across to many asset classes are difficult to track.
Marcus Brookes, a Schroders fund manager said: “Holding assets with a strong potential return profile that have very little economic relationship to each other, for instance US property and Japanese equities is a good idea.”
“The aim should not be to invest in an asset with a poor potential return in order to diversify the risk from an asset with a good potential return, that is known as “diworsification” – risk may be reduced but returns certainly are.”