When two wrongs almost make a right

Last year I said that the predictions made by 'experts' regarding the FTSE 100 performance for 2014 were (and I'm quoting myself here), "Wildly over-optimistic".

Five leading firms made an average prediction that the FTSE 100 would close at 7,560 on 31 December. It actually closed at 6,566 - more than 1,000 points (or 14 per cent) lower than predicted, falling by 183 points from its starting point of 6,749 at the start of January 2014. Based on total returns (including dividends) I predicted that the FTSE would increase by eight per cent. It actually increased by a paltry 0.74 per cent, so even my relatively conservative prediction was way out.

However I did correctly predict that commercial property would be the best performing asset class. My guess was that the IPD (Investment Property Database) Index would exceed 12 per cent and property would increase in the region of 10 percent during the year. In the case of this asset class, I was too pessimistic as the IPD Index actually increased by close to 20 per cent (estimated based on figures to end November 2014, as the annual figures to the year-end were not yet available as at the time of writing) and the sector average for property funds to 31 December 2014 was 11.70 per cent, which is an incredible return in such a short time frame.

How would you have done?

So if you agreed with my predications last year that property would be the best performing asset class and invested everything into it, you would be very happy indeed.

But we don't advocate putting all your eggs in one basket. Let's assume that you hedged your bets and invested 50 per cent into a FTSE 100 tracker fund and 50 per cent into commercial property. The returns based on my predictions (assuming an investment of £10,000) would have been as follows: (Please note that this simplistic calculation ignores costs and tax and is purely to illustrate a point).

 

FTSE 100                                £5,000 x 8 per cent =                          £400

Commercial Property             £5,000 x 10 per cent =                        £500

Predicted total return =                                                           £900 (9 per cent)

 

The reality at the year-end would have been:

 

FTSE 100                                £5,000 x 0.74 per cent =                     £ 37

Commercial Property             £5,000 x 11.70 per cent =                   £585

Total return =                                                                          £622 (6.22 per cent)

 

That's still a pretty good return especially compared to the pathetic level of interest you currently get on cash. However we would usually advocate a more diversified portfolio than just property and UK equities.

Looking ahead

The average prediction by five leading investment managers for 2015 is for the FTSE 100 to reach 7,320. Citigroup has been the most optimistic at 7,700 and Goldman Sachs a little more pessimistic at 7,100. I think the average is too optimistic once again and believe that a more realistic year end close would be 7,025, with a peak at some point above 7,100.

I also believe that returns for commercial property will continue to be strong but will be in the region of nine per cent for the year. However with the FTSE 100 currently at around 6,400, I think that (from this level) the FTSE will actually deliver the highest return. On that basis and on the off chance that you did put all your money into property, then I would suggest you consider switching it out today and reinvesting in a FTSE tracker. I would keep it there until the market hits 6,950 (it could go higher but let's not be greedy) and then switch it back into property. This is only my opinion and does not constitute advice, you understand (of course you do).

It is always interesting putting your 'mouth where your money is' and I look forward tracking progress and reporting back next year. 

Colin Lawson is founder and managing partner of Equilibrium Asset Management

He writes a regular blog about wealth management for Private Client Adviser