What was the best investment in 2013?

January 15th, 2014 by

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Dan Woodruff

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

What was the best investment in 2013? This article will give you all the information you need.

This article aims to show you what was the best investment in 2013 and in the last 5 years – by investment sector. What we aim to show you is that predicting investment returns based on past performance is very difficult to do, and is fraught with danger.

Key points:

  • Summary of our data into the best investment in 2013 and over the last 5 years
  • Analysis shows there is no clear pattern, although UK Smaller companies was 1st in 3 out of 5 years
  • You should not try to time the market, but instead diversify your investments


We have conducted some research into the best investments in each the last 5 years – 2008 to 2013. We have looked at the UK Unit Trust sector averages for each of the investment areas we typically recommend for our investment portfolios, plus a sample UK 90 day notice bank account and UK inflation (retail prices index). The results might surprise you…

Here is the data

What was the best investment in 2013?

Analysis

On the face of it, this table shows that in 2013 the best investment was UK Smaller companies – coming 1st out of 14 in our table. In fact, this sector was also the best investment of 2012 and 2010. Of course it is not as simple as this. The fact that this sector was the best out of our data proves nothing for 2014. That period has now passed, and as the saying goes: past performance is no guide to future performance. So what can we learn from this?

Can you see a pattern?

We have graded the various years into colour codes, and listed the sectors broadly by risk (lowest risk towards the top, highest towards the bottom). What is clear is that it is difficult to read a pattern into this data.  Each of the sectors has been in the top 25% at some point, apart from property (although if you go back further property would have done so too before the credit crunch).

The main thing to say is that there isn’t really a pattern. It is almost impossible to predict which sector will be the best investment in 2014 in advance. This is why we recommend a strategy of diversification (see below).

Cash accounts

We see many would-be investors avoiding investing their money and leaving it in the bank. They say this is a low risk strategy, and it is because their capital is not at risk. However, what the above data shows is that this strategy leaves your money at risk to inflation. If you compare the sample bank account – the MoneyFacts 90 day notice account – with inflation (RPI), you can see that the bank account returns less than inflation in each year covered by this data. We covered this subject in a previous article How inflation hurts your savings.

Beating inflation

So if one of our goals should be to beat inflation (and it should), then in which sector should you invest? Unfortunately, there is no easy answer to this either. What is clear is that none of the sectors analysed beats inflation in every year covered. Generally, you should expect that shares should outperform inflation over time, but there is no guarantee with this.

Shares

What is certainly true, is that typically over time shares do tend to beat inflation, and do tend to outperform cash. However, as you can see from the above, they also tend to be much more volatile. Based on the above table, the best investment in 2013 – UK smaller companies –  had 1 negative annual period out of 5. The swings were wild: +50%, then +30%, then -9%, then +22%, then +37%. This is why the general trend is upwards in this sector.

Timing the market

There have been various studies on the attempts of amateur investors to try and time the market. The truth is that this is nearly impossible to get right every time. In fact, investment markets tend to move very quickly. If you miss the tipping point even by a few days, you can halve the investment returns. This can have the effect of moving your investment return from a positive to a negative.

Therefore, to get the best investment return (or at least a more stable investment return), we recommend avoiding trying to time the investment market. You need to decide the risks you take and then keep to that position, adjusting as you go.

Diversification

The data table above shows that if you follow a strategy of diversification you will smooth out your returns. By buying into many or all of the sectors shown in our table, you can get some of the upsides and iron-out some of the downsides which will inevitably happen. The problem is that you do not know which will be the best investment in 2014, so the solution is to spread your money around to hedge your bets. You simply need to adjust this strategy according to the risks you are prepared to accept, and the returns you wish to achieve.


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