For most investors, 2015 has been a tough year. The FTSE 100 had a positive first five months of the year, but has since fallen heavily, and is now in the red for year-to-date. And while dividends may have reduced the effect of capital losses somewhat, most investors are likely to have lower portfolio values now than on New Year’s Eve 2014.
Looking ahead to 2016, the prospects for the FTSE 100 are decidedly uncertain. The impact of US interest rate rises is a “known unknown”, as are the growth prospects for China. And with the Eurozone still offering very slow growth, Japan in recession, and the outlook for commodities being very unstable, there is a degree of nervousness among many investors.
As such, many people will be pessimistic regarding the likely performance of their portfolios in 2016, But, by following three simple steps, you can maximise your total returns in the next twelve months.
Firstly, if 2015 has taught us anything about investing then it is to diversify. Piling into oil stocks or mining companies at any point during this year would have led to major losses and so, while those two sectors could be strong performers in 2016, it makes sense to spread the risk among a number of other sectors, too.
Not only does this help to keep losses in check, it also allows you to tap into growth potential outside of a narrow group of companies. For example, the banking sector continues to offer excellent value for money, while UK supermarkets present an enticing turnaround story. Furthermore, pharmaceutical companies offer less highly correlated returns than most other sectors, and consumer goods companies could benefit from increasing demand from emerging markets for their products. By diversifying, it is possible to access all of these opportunities and reduce company (and sector) specific risk.
Secondly, with the oil price continuing to come under pressure, UK inflation is stubbornly low. In fact, it is likely to hover around zero in the early part of next year and, even if it does rise somewhat, the scope for an interest rate rise is rather slim. As a result, it would be of little surprise for interest rates to either remain at 0.5% for the whole of 2016, or else only rise by a very small amount.
Therefore, dividend stocks are likely to remain very popular. It is still possible to obtain 5%+ yields among many of the FTSE 100’s largest companies and, while it is the same story as has been prevalent for a number of years, higher yielding stocks could remain en vogue throughout 2016. Because of this, topping up on them now could be a wise move.
Thirdly, the temptation when a portfolio is not performing well is to sell up and invest elsewhere. This, though, is probably the worst thing an investor can do, since successful long term investing requires a great deal of patience.
Certainly, returns from the FTSE 100 have been poor this year, but 2016 could be a very different story. And, with a number of high quality companies trading on low valuations, now appears to be the time to hold on for the long run. Besides, the costs from over-trading can easily mount up and eat into future profits — even with lower online dealing commissions.
