At this time of year, investment pundits start sharing their predictions about the likely performance of individual asset classes over the next twelve months.
It’s a fun game, and one in which I have often participated in the past.
When asked where the FTSE 100 index will end up in 2012, the only answer you can really believe is “I don’t know!”
I was reminded this morning by a fellow IFA that, at the end of last year, I put my predictions for the FTSE 100 at the end of 2011 into print. In this article, I joined several other ‘experts’ with a rather bullish prediction that the index would finish 2011 at 6,700.
Leaving aside the remote possibility of the biggest rally in history over the next few days, I was wrong. Very wrong.
My only consolation comes from the fact that none of the pundits in that article were remotely close to a correct forecast.
As I type this, the market is trading at around 5,400 points. It finished last year at 5,899.90, so has lost some 8.4% in value as I type this.
During the past year, it has been as low as 4,791 and as high as 6,105.80, demonstrating the often extreme levels of volatility we have experienced in 2011.
To some extent, the performance of the FTSE 100 (or any other arbitrary investment index) doesn’t matter too much. It would be very rare (and probably quite foolish) for any investor to be solely exposed to a single index or investment asset class.
Instead, our clients are invested across a wide range of asset classes; some will perform well in a single year and others will perform less well.
This year for example, we have seen double-digit returns from the various fixed interest asset classes, with over 20% from our preferred index linked gilt fund. The profile of investment returns this year have tended to benefit more cautious investors who have a greater allocation to fixed interest securities.
The inclusion of asset classes in a portfolio which generate positive returns in a year will naturally balance out the negative returns from other asset classes.
Added to the way the performance from different investment types are negatively correlated, our investment advice process ensures that we make only small tactical ‘bets’ on any given asset class.
Regardless of how bullish we are about a particular asset over the coming year, our Investment Committee will stick relatively closely to the strategic asset allocations we have determined are suitable for different investors over the long-term.
In fact, one minor change we made to our investment advice process this year was to start making smaller tactical adjustments each quarter. Strategic asset allocation is after all what delivers the greatest share of returns to investors.
As for where the FTSE 100 will end 2012, the answer will depend on the reliability of your preferred crystal ball.
At the 5,400 level, there is undoubtedly good value in the index for investors. It currently trades at a p/e ratio of 9.7 compared with a historical average closer to 12.
On that basis, if we had to guess, we would like to see the market end up at around 6,100 by the end of 2012. However, it is bound to be a roller coaster ride along the way, particularly until the euro sovereign debt crisis can be resolved.
Photo credit: Flickr/justin_a_glass
