Passive Investing Might Not Cut It In The Coming Decade

Passive Investing Might Not Cut It In The Coming Decade
Stéphane Renevier, CFA

30 days ago2 mins

Queue the nostalgia: the next decade is probably going to look very different for investors, compared to the last one. Ultra-low interest rates are out, and higher inflation and economic volatility are in – signaling a likely end to stable, predictable markets.

According to hedge fund titan Bridgewater, the implications of all of this could be big on your portfolio. In this chart, Bridgewater has helpfully color-coded where your investing returns came from in the past decade versus where they’re coming from today.

The good news is that cash isn’t “trash” anymore, and you can now earn an attractive yield without taking much risk. That stands in stark comparison to the past ten years, when you’d have faced negative real returns on your cash – forcing you to invest in much riskier assets to achieve high returns.

Now, the past ten years were indeed “exceptional” (as the chart says) when it came to simply buying and holding stocks, bonds, and commodities (those moves are your “beta”), but the next ten years probably won’t be. You’re still likely to see returns on your passive investments, but they may be a lot more “meh” than “wow” – think: 5%-8% per year for stocks versus the 10%-plus of the past decade. You can also expect to see a lot more variability from one stock to the next, and you might have to stomach bigger price swings.

That brings us to the “alpha” – the returns generated from taking active views. You might not have needed this approach in the past decade, thanks to the strong gains a set-and-forget tactic would’ve handed you. But if Bridgewater’s right, that simple passive strategy won’t cut it anymore. Soif you’re aiming for the juicier returns of the past, you might have to roll up your sleeves and take a more hands-on approach. Now, you don’t have to ditch your long-term game plan for day trading. But it may pay off to be a bit more tactical: overweighting assets that have above-average odds of delivering higher returns in the longer term, and being quick to react when opportunities appear.

Of course, that’s not easy – not even for professionals. The trade-off, then, might be between accepting lower returns, and leaning into a riskier, more active approach. The silver lining here is that, with the higher volatility of this new era, we could see a fresh breeding ground for new opportunities.



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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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