"I want the best investment" is a common thing for investors to say, but what does it actually mean? It sounds so straight forward but is it? The short answer is, no.
The long answer, is broken down in the rest of this video, because the best performer as an investment is not what you think:
The best investment comes down to 2 main factors:
· A person’s perspective
· Time
By perspective, I mean, how does a person feel about what they are investing in. To one person, the best investment might be keeping their money as safe as possible so they can know it’s protected, and anything else would cause them too much stress. While to another, the best investment might be in their own personal health, or perhaps investing into their community, a privately held donut shop, or just good old fashion high returns. Someone’s priorities matter to determine what is ‘best’.
Time is the other factor because the best investment today will look different compared to the best over the next year, or 3 years, 10 year, 20 years or 50 years. 1 investment will not be the ‘best’ for all those different time periods, so it’s crucial to understand the timescale we are planning for.
Let’s see some examples:
Let’s start with the sectors of the S&P 500, the largest index in the world, that is based in the US and includes 12 different sectors, shown here.
If we look back nothing is consistent. Not one is consistently bad or consistently good. There isn’t even a pattern that one year is bad and it’s followed by a really good year, or vice versa. It’s just about totally random.
Here’s some interesting points though:
Information Technology or ‘tech’ was the best performing sector, which probably isn’t a huge surprise to many.
Communication Service performed the worst, giving an average annualised return of only 3.68% for the 15 years. If you don’t know what communication services companies are, a few examples include big names like Netflex, Meta/Facebook, Version, Vodafone, Google/Alphabet, and AT&T. Often, people think these are Tech companies, but they are categorized as communications. Surprised? Well, hold on.
The next bit is that Consumer Discretionary was the 3rd best sector, returning 11.01% per year. That includes lots of retail brand and businesses like Nike, Tesla, AirBnB, McDonalds, Amazon, Stellantis which is a car company who’s brands include: Jeep, Dodge, Chrysler, Fiat, Alfa Romeo, and Citroën. I don’t think many people expected back in 2008 during the Global Financial Crisis that discretionary purchases would be such a winning sector to invest in.
The S&P 500 itself averaged out all of these sectors so it performed in the middle, which is kind of like the goldilocks zone of not too hot and not too cold.
So sectors are unpredictable and somewhat surprising over the long-term. Well, is that just sectors while other things are more predictable like which country will have the best stock market? Maybe, but let’s see what the data show. Before we do, what country would you guess would have the highest performing stock market of the 41 developed and developing countries? Think about it.
Here’s a grid that shows each countries individual year performance and their averages. The best country’s stock market from 2003 – 2022 was…..Denmark.
For any Kiwis, NZ came in spot number 23. While the US ranked at 14th, just behind Sweden. Now the question becomes, out of every person you know or have ever listened to about investing in the share market, who said that Denmark was the place to invest at any time over the past 20 years? Having worked in finance for a while, I counted up everyone I know that had that answer and found it was 0.
But time is the other element we talked about, so if we change from the last 20 years to the last 5, this looks very different. You’ll notice that Indonesia went from being #2 to 21st, Italy went from 40th place to 17th, jumping way up, and Colombia fell all the way from 4th place to 37th.
If we look at just the last 2 years of 2021 and 2022, then Turkey became the best performing stock market, NZ dropped to 3rd from last, Chile did much better and if you remember back to early 2022, there was another country that was part of this data that would have been #3, but then they invaded another territory, and their share market dried up completely.
So we can start to see that countries, just like sectors are not predictable and the best ones shift over the timeframe we are considering.
But let’s also consider asset classes, which is like saying the chunks of investments between cash, bonds, property, shares and the like.
We can again see that things look pretty closer to random between these different asset classes, except one pattern emerges. If you took a portfolio that blended all of these things so that 50% was in shares and property with the other 50% in bonds and cash, you’d be right in the middle. That portfolio never performed at the top, in fact, never even in the top 3 for any 1 year, however, it also never showed in the bottom 3. So a 50/50 portfolio was more consistent and had lower risk, which makes sense because it was more diversified.
1 last example is when it comes to individual shares or stocks. Let’s look at a stock that had one of the best years of performance of any stock in the US since 1980. It was Qualcomm, and in 1999 it returned 2620%, which would turn $1,000 $27,200. But that was just 1999, so let’s imagine you hear on the news what a great investment Qualcomm is, and on the 1st of January 2000, you invest and wait. Well, you’d have made about 106% which over doubles your money. But when you compare that to the S&P 500, it grew by 229%, and for lower risk. So picking the best stock of the last 4 decades, still ended up not being a winner in the long run.
In conclusion, some takeaways are:
The best investment depends on what time scale you are looking at
If you think you want the best investment, it will help to set better expectations and understand these things are variable and unpredictable.
The best solution is to diversify as broadly as you can, across sectors, countries, and asset classes.
Then, wait. The longer the better for allowing compounding growth to take place, however, trying to pick the short-term winners is a losers game and every study shows that most professionals and individual underperform compared to an index.
So as the quote goes, “if you spend 13 minutes analyzing economic and market forecasts, then you’ve wasted 10 minutes” – Peter Lynch.
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