Picking the winning asset classes on a yearly basis is a tough gig. Last year there were some surprising winners and losers
This time last year there was a chorus of economic commentators calling on investors to sell government bonds as they reasoned that the US Fed had to start raising interest rates in 2014. Those rate rises didn’t happen. In fact, economic conditions in some economies deteriorated and global government bond yields contracted and prices of the bonds rose.
This meant that Global Government Bonds (AUD hedged) were the third best performing asset class for 2014, with Australian Composite Bonds (the Composite Bond Index comprises approximately 70% government bonds) coming a close forth, up 11% and 10% respectively. While not shown in the graph below, unhedged Global Government Bonds would have been the second top performer if currency appreciation was included. Australian shares had a relatively poor year with a 5% increase according to Philo Capital, as shown in the graph below.
The unexpected results for last year’s top performing asset classes tells us that diversifying your portfolio will help smooth and protect overall returns.
Sure you may miss out on some of the really big years for individual asset class returns, but then you’d also miss out on the lows.