What was the best investment in 2012?

January 11th, 2013 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.
Dan Woodruff

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If you are thinking about investing some of your money in 2013, you may ask yourself ‘what was the best investment in 2012?’

This article aims to show you what was the best investment in 2012 and in the last 5 years – by investment sector. Of course, experienced investors among you will already realise that in fact knowing last year’s best investment area by no means helps you to predict this year’s best investment.

Key points:

  • Summary of our data into the best investment in 2012 and over the last 5 years
  • Analysis shows there is no clear pattern
  • 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 – 2007 to 2012. 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 2012?

Analysis

On the face of it, this table shows that in 2012 the best investment was UK Smaller companies – coming 1st out of 14 in our table. Of course it is not as simple as this. The fact that this sector was the best out of our data proves nothing for 2013. 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 2013 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 Moneyfacts index of bank accounts versus UK inflation you can see that the bank account lags behind inflation in 4 of the last 5 years. Therefore, the best investment in 2012 (or previously) was certainly not cash; you would be losing money in real terms. See our article and video on how much cash is too much.

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.

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 2012 – UK smaller companies –  had 2 negative annual periods out of 5. The swings were wild: -40%, then +50%, then +30%, then -9%, then +22%. It would be a brave investor who put all their eggs in this basket!

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 righ 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. Read more about the perils of timing the market with our article Guessing the investment market will only lose you money.

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 2013, 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.

Watch the video on our free Investment Management guide and video series:

Dan Woodruff of Woodruff Financial Planning discusses the free Investment Management guide and video series, plus how this can help you manage your assets.


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One Response to “What was the best investment in 2012?”

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