Tuesday 16 April 2013

Where to invest for the next 5 years?

Question
I already have a well diversifed portfolio and emergency cash accounts. I am going to be receiving a fairly high lump sum soon and would like to receive your view on where to invest this now, disregarding attitude to risk, but taking into account the high stock market index at the moment (around 6500).

Which funds or fund sectors would you invest in at the moment that would give a decent return over the next 5 years?Answer
I would be nervous about making any big bets over the next 5 years. My concern is that it's likely stock markets have more propped up by massive Central Bank intervention in recent years, i.e. governments indirectly pumping a small fortune in to markets, than a fundamental improvement in fortunes.

Of course, the intervention might pay off medium to longer term (by which I mean 5-10+ years) if it kick starts sustained economic growth, but if it doesn't we could, at best, be in for quite a stagnant few years ahead.

The other issue that makes short term predicting especially haphazard is that stock markets seem quite disconnected from economies shorter term. With all the generally negative economic news around you'd think markets would be riding low than high. The above mentioned intervention has likely played a big part, but some companies have been very profitable too - in many cases thanks to depressed domestic wage growth (because of struggling economies), outsourcing to cheap developing markets and growing exports to emerging middle classes in those developing markets. Well run global companies who are good at squeezing costs to the bone (well, sadly not at CEO level!) and selling in-demand exports are, in very general terms, reasonably well placed short term.

Over a 5 year time scale I'd be more inclined to follow your existing diversified approach than focus on any one particular sector.

Over a 10-20 year period I'd back emerging markets and commodities in general, as both stand to profit handsomely from a long term growth in global demand for goods and services (primarily driven by emerging markets themselves as their domestic demand grows). However, there'll probably be quite a lot of volatility along the way, hence my reticence for bets over a shorter period.

There are always seemingly tempting investment stories around for those willing to take a punt: infant emerging markets, undeveloped land, alternative energy and biotechnology appear popular at present, but in my view the potential risks and uncertainties are too high for most investors (including me).

Read this Q and A at http://www.candidmoney.com/askjustin/841/where-to-invest-for-the-next-5-years

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