As we near the end of the second decade of the 21st century, investors struggle with a rapidly changing world. Looking at the cutting edge research on various aspects of financial planning and investment management, we offer a 21st century success recipe for investors.
Longevity:
Life spans are rapidly increasing with improved access to healthcare facilities. Immortality theorists are opining that by 2047, the human race would have reached the option of immortality. The very meaning of being human will change and investment maxims have to keep pace. Indexing and index fund investments offer a low cost, high probability of success alternative, in an era of unpredictable changes. This is a simple, cost effective and diversified strategy to flow with the winners and to cut the losers from portfolios.
Universal Basic Income and Welfare Statism:
As technology takes over a pervasive role in all aspects of life, most of humanity will depend on a state provided universal basic income with safety nets of minimum state sponsored education, healthcare, housing and basic living requirements. Recently I was fortunate to interview Herman De Croo, 82, the grand old man of the Belgian Parliament. A sixth generation Mayor De Croo has won a record 22 elections since the 1960s, when he first contested for the same. He spoke of the state’s welfare where 50 per cent of the state’s revenue are directly returned the disadvantaged segments of the population. The lesson for investors is that Universal Basic Incomes and welfare will become a global norm. The beneficiaries will be consumption-related sectors, utilities and service providers.
De Dollarisation:
The big monetary move of the 20th century was the replacement of the Sterling Pound and to a lesser extent of the French Franc and German Mark, by the emergent US Dollar as THE Reserve currency of the world. This played a significant role in the emergence of the US as the dominant economic, military and intellectual power of the century. This is under active challenge, as increasingly ultranationalist regimes are protesting the weaponisation of the US dollar in the form of economic sanctions, tariff barriers and denial of access to markets. For investors, currency, geography, markets and industry diversification is the best way to address this seismic shift.
Start-ups and Disruptive Forces:
There is a power-shift to challenger firms from large firms, with technology and data empowerment reducing information asymmetry and entry barriers. In this power-shift, small and mid caps will offer potentially superior returns, with higher risk, than bigger players. If drones can beat billions of dollars of advanced defences and destroy five per cent of global oil productive capacity in one evening, the potential of disruptive technology to create new revenue streams and damage existing revenue streams can be well imagined. Diversification and position sizing becomes very significant in such a scenario.
Climate Change, Renewables and Sustainability:
The Tipping Point has been crossed. Fossil fuel based industries and companies will no longer be in existence in three decades or less. Institutional investors are already divesting from coal miners, oil producing companies and thermal power producers.There will be a premium on environment-friendly companies providing sustainability solutions. New sectors and solutions providers will emerge as attractive investment opportunities.
These are just a few of the mega trends that will drive the world of tomorrow. Investment lessons and success drivers from these will alter the financial planning landscape at a larger scale. But certain fundamental investment tenets will remain constant. With technology unleashing disruptions on unprecedented scale, options before investors are very bewildering. In that scenario, eternal principles of indexing, diversification and disciplined rebalancing will hold tremendous significance.
The author is Executive Chairman, OPC Asset Solutions