Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. 

This article first appeared in the Telegraph 

If you complete enough rounds of golf at one course (and I confess that I have) you will build up a database of scores that will allow you to play an amusing if unrealistic game. You can put together an imaginary round in which you count only your best-ever score on each hole. Because most golfers enjoy occasional moments of competence, they can imagine, however briefly, life in a parallel universe in which they are something more than a frustrated weekend hacker.   

You can do something similar with your investments if you are so inclined. In this case the game involves picking only your best performing investment from any one year. It’s just as unrealistic, of course, but it is quite fun to see what might have happened if the last 18 years had been the financial equivalent of your ‘if only’ round. As with the golfing version of the game, you can also see what a round of your worst picks would have looked like. 

To help play this game, we look each year at 15 different investments spread across a range of stock markets around the world, as well as different types of bond and commodities and real estate. We’ve just done the interim analysis for the first six months of 2021 but before seeing what it tells us, let’s play the game.

Running the numbers from 2003 to 2020, investing in only the best performing investment class in each of the 18 years would have generated annual gains of between 6% and 59%. The best ‘hole’ was emerging markets in 2009 while the worst was government bonds in 2018, a difficult year for stock markets when only the safe haven of fixed income kept an investor’s head above water.

For every pound you notionally invested at the start of 2003, rolling it into the next top performing asset at the start of each year, you would have ended up with £99. A near one-hundred-fold increase in your initial investment - in golfing terms, a string of birdies with a couple of eagles thrown in for good measure.

If, on the other hand, you had endured the investment equivalent of losing some balls in the long grass, dropping a couple in the lake and generally making a right Horlicks of the round, you would have had a very different experience of the past 18 years. Over that same period, picking the worst performing asset classes, and compounding your mistakes year after year, would have turned your £1 investment into just 24 pence. Just as emerging markets provided the best score in the winning round, they also delivered the worst in this one - down 35% in 2008.

None

So, what conclusions can we draw from this fantasy game? First, and most obviously, if you can pick the winners each year and avoid the losers you will end up very rich indeed. Unfortunately, and this is sadly also obvious, timing the market like this is about as likely as playing that imaginary wonder round. The leader-board is completely unpredictable ahead of time, with the emerging market shares example illustrating how one asset class can move from top to bottom and back again scarily quickly - they were also the top performer in 2007 and the bottom in 2011.

The second lesson we can take is that putting your eggs in a wide variety of baskets will smooth your returns over time. You won’t multiply your money a hundred-fold between the birth of your child and their A-levels, but you are also unlikely to lose three quarters of your starting capital either. During that 18-year period there have actually been six years when all 15 of the asset classes we track delivered a positive return and there has not been a single year in which all of them lost value at the same time. So, the odds are stacked in your favour even if you eliminate a great deal of risk by sensible diversification.

Turning now to the latest six months, this has been a typical period in which there have been both winners and losers, but the outperformers have more than outweighed the laggards. Top of the leader-board in the six months to June has been commodities, thanks to the continuing strong performance of both oil and industrial metals as the world emerges from the pandemic, economies re-open and we begin to return to normal. In second place is real estate, also a re-opening story and a reversal of last year’s performance when retail and offices endured a torrid period during repeated lockdowns. 

The split thereafter is straightforward. It has been a generally very good six months for shares, with the US leading the way as it rolled out vaccines quickly and prioritised its economy. There has been an interesting east-west divide this year, too, as China chose not to copy the West’s fiscal and monetary stimulus packages and Japan fluffed its vaccinations. The real laggards in the year to date, however, have been the various flavours of bond, with government paper falling the most while corporate bonds were protected in part by the improving economic backdrop. 

One final observation. While the leader-board is unpredictable and never repeats itself, it does sometimes rhyme. The last time that commodities and real estate occupied the first two positions in our ranking was 2000. This was, like now, the year after a very strong period for shares (emerging markets up 72% in 1999!). Stock markets tend to anticipate growth while commodities and property do well as it is actually happening. And the following year? Bonds and cash were the place to be as investors sought out a port in the storm. Sometimes, you’re better off retreating to the clubhouse. 

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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