There’s more to success in investing than backing yesterday’s winners, I reckon. Worse, going for past winners could actually lead to investment losses because past performance is no guarantee that future performance will be as good. Often, it’s much worse.
Crashed ISAs
Take Cash ISAs, for example. Around 12 years ago, they were flying. Providers were falling over themselves to pay the highest interest rates, and new entrants into the market were emerging from unlikely places, such as Iceland and India.
I played the money shifting ISA game myself at the time, moving balances around to capture the highest rates. But the activity ended in chaos. I escaped with my money by the skin of my teeth when Iceland plunged into its financial crisis in late 2008, which involved the default of all three of its major privately-owned commercial banks.
And buy-to-let has been a licence to print money for many private landlords over the past couple of decades. But the storm clouds have been gathering over the sector for some time, and those early investors have been selling up to cash in their gains in their droves.
A new punitive tax regime and the threat of higher interest rates ahead make the idea of buying and renting property far less appealing to me going forward. I have no confidence that I could turn an overall profit in that kind of business over, say, the next 10 years.
Speculative roller coasters
Then there are out-and-out speculative vehicles such as Bitcoin and gold. The trouble with those two is that nothing much drives the price other than speculation itself. And speculation begets speculation. If buying starts to move the price higher, others see the move and buy too, thus driving the price even higher, and so the cycle repeats.
However, it works in reverse as well. Selling moves the price lower, which leads to more selling, and so on. So, as I see it, the price of speculative things like Bitcoin and gold can move in waves, or cycles, up and down, and there’s no way of reliably telling whether the next move will be higher or lower.
Evergreen returns
But there’s one type of evergreen investment I’m using to build my wealth, and it has a strong pedigree and a long history of delivering market-beating returns: shares and share-backed investments such as funds.
Over the long haul, shares have outperformed all other major classes of asset, such as property, bonds, cash and commodities. According to Prudential, the average annual return on UK shares between 1989 and 2014, adjusted for inflation, has been 5.2%.
Now, 5.2% might not sound like much when you compare it to the big moves in the likes of gold, Bitcoin and property. But if you compound that kind of return by reinvesting dividends, it can add up to big gains over time. Perhaps enough to propel you to a million-pound portfolio and without as many sleepless nights induced by more-speculative strategies.