10 months ago • 2 mins
As investors, we tend to put too much weight on the past when making predictions about the future. Our predictions are often anchored to what’s happened before, and our assumptions are that past trends will persist. If we’ve only known a world of low interest rates and stable inflation, we’re likely to consider that the norm and anticipate a rapid return to this state. And since those trends tend to be slow-moving, we’d be right for a while. The issue is, we might miss the boat when the tide is truly turning. And there’s a fair chance that it might be turning now.
The war on inequality – as Bank of America calls it – could lead to a tectonic shift in structural trends. From a societal point of view, “Main Street” (and the 99%) may fight “Wall Street” (and the 1%). Peace and democracies might make way for wars and dictatorships. From an economic point of view, fiscal excesses (governments’ going big on spending) might replace monetary excesses (central banks’ going big on liquidity). Isolationism might replace globalization. High inflation may replace low inflation. In financial markets, a period of higher instability and volatility may replace the sense of calm and stability that characterized the past ten years.
It means two things for your portfolio. First, don’t assume that the assets that performed best over the past decade (i.e. financial assets like bonds and stocks) will do so in the coming one. Real assets like gold and other commodities and “old economy” stocks could do better in an environment of heightened government spending and inflation. Second, expect more volatility and a bigger differentiation in asset class performance. In this environment, you may want to consider buying and holding a truly diversified portfolio (i.e. not just US stocks) while managing some of your investments tactically (actively, with guardrails against the downside). There are likely to be some great opportunities for investors who can be adaptable, flexible, and informed.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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