The investment industry and media are often focused on the recent past – the latest fund fad, hot share tip or investment craze. But it’s worth remembering that investments that did well last year aren’t guaranteed to do well this year.

I’ve learnt the hard way that trying to second-guess which investments are likely to be hot in the future, and which not, is a bit of a mug’s game. The potential permutations are virtually endless, such are the huge number of possible unknown factors that can weigh on markets at any time. Due to the constant push-and-pull effect on individual investments, the range of possible outcomes is so wide that it’s near-enough impossible to get consistently ahead of the market. And if professional fund managers generally can’t do so either, as studies show¹, ask yourself: why should you?

It’s why, at Vanguard, we advocate a more strategic approach to investing, so that investors are better able to manage potential risk against potential reward. It’s a simple philosophy too that is broken down into our four investment principles but is also reflected by the age-old advice to ‘not put all your eggs in one basket’. Or as our founder, Jack Bogle, famously put it, having launched the world’s first stock market index fund: "Don't look for the needle in the haystack. Just buy the haystack!"  

Funds vs shares

It’s why we just sell funds. We believe investors should look to spread their risks by pooling their investments through funds rather than by buying individual company shares. This is because funds give you something that individual shares can’t, which is exposure to a portfolio of different company shares in one hit – what we might call ‘instant diversification’.

Of course, there’s nothing to stop you building your own portfolio, share by share. But do you really have the time, inclination and skillset to pick and track the performance of your own stocks? Do you want the extra stress? And what about the added transaction costs?

Also, how many shares would you need? Our research shows that even a portfolio of 30 different shares isn’t enough to provide you with the kind of diversification needed to match the full market return².

Investing by industrial sector

As an alternative, you may be tempted to invest in whole industry sectors rather than individual companies – instead of BP, say, all of the world’s oil and gas majors; instead of Apple Inc., all of the tech sector. But, here, you’re faced with a similar dilemma (and risk). Since you don’t have a crystal ball to see into the future, you can’t know for sure which trends will continue or take off or flounder.

Just because a sector did well one year, doesn’t necessarily mean it will do well the next, and vice versa. The table below provides some evidence of that, by showing how the global market’s sector leadership can move around.

Global stock market performance by industry

Past performance is no guarantee of future returns. Source: Vanguard calculations, FactSet. The data is as at 31 December, 2020, and is based on the FTSE Global All Cap Index Fund. The returns shown are gross, denominated in GBP and assume dividends are reinvested. Sector categories are based on the Industry Classification Benchmark system.

What’s clear is that technology stocks have been on a tear in recent years, while oil and gas shares had a terrible 2020 as the pandemic crushed demand. But things can and do change as economic and operating conditions change or as valuations in one sector become too expensive and others too cheap. So overlooked financials, industrials and utilities could yet come back into vogue, or maybe not. Likewise, it’s possible that large technology companies could come under pressure, with the increasing threat of regulation potentially dampening their market dominance.

The point is having all your investments in one sector, such as technology, adds to your risk. So it’s better to spread the risk – other sectors have done well too.

Investing by market or asset class

It’s a similar challenge if you slice and dice the market in other ways and invest according to different types of investments. This includes different regional markets and different types of bonds and shares.

As the second multi-coloured table below shows, these also go up and down, year in, year out, so how much can you really rely on recent trends to guide you when putting your money to work.

Market performance by asset class

Past performance is no guarantee of future returns.
Source: Vanguard calculations, using data from Barclays Capital and Thompson Reuters Datastream and FactSet. UK equities is defined as the FTSE All Share Index, European equities as the FTSE All World Europe ex-UK Index, developed Asia equities as the FTSE All World Developed Asia Pacific Index, North American equities as the FTSE World North America Index, emerging market equities as the FTSE Emerging Index, global equities as the FTSE All World Index, UK government bonds as Bloomberg Barclays Sterling Gilt Index, UK index-linked gilts as Bloomberg Barclays UK Govt Inflation-Linked UK Index, hedged global bonds as Bloomberg Barclays Global Aggregate Index (hedged in GBP), UK investment grade corporate bonds as Bloomberg Barclays Sterling Aggregate Non-Gilts - Corporate Index. Returns are denominated in GBP and include reinvested dividends and interest.

The bottom line is that past performance is no guarantee of future returns. Just because this type of market or that sector has done well of late doesn’t necessarily mean it will continue to do well.

Equally, just because some investments or share sectors look expensive because they’ve risen sharply in recent years doesn’t necessarily mean they are an accident waiting to happen. And, conversely, just because some markets have been down in the dumps for a long time doesn’t mean they are necessarily undervalued and likely to boom if only markets ‘uncovered’ their mistake.

Instead, focus on your goals and build an investment portfolio that is designed to help you achieve those goals through thick and thin, by ensuring your assets are appropriately balanced with the right mix of shares and bonds and globally diversified across different markets.

¹ Plagge, J-C., et al: The case for low-cost index-fund investing, Vanguard Research, April 2020.

² Tidmore. C et al, How to increase the odds of owning the few stocks that drive returns, Journal of Investing, December 2019

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Other important information

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