Is this the New Paradigm?
How can investors distinguish between
“traditional” elements of consumerism versus a shift towards a new
macroenvironment consisting of rising costs, diminishing natural resources, and
a widening gap between the rich and poor?
The role of specialized thematic investing…such as alternative energy,
agriculture, environmental studies….is increasingly becoming more vital…and
profitable. As these transitions magnify
in intensity there develops more emphasis upon how to quantify these silos in a
changing landscape.
But is the evolution momentary or
permanent? After the last decade of low
interest rates and consumerism at any (all) costs we must look at the drivers
of a new secular tailwind. Cars are more
expensive, but leading to an electric alternative to fossil fuel
consumption. Energy and other natural
resources are becoming more scarce, but now the progenitors of new science and
innovation in their respective spheres.
Global hunger and poverty are ubiquitous, providing the motivation for a
new generation of socially responsible bankers, scientists, thinkers, and
moralists. Efficiencies are being
uncovered in technology, healthcare, and industry. Investing in these nascent capital markets
can potentially lead to a better planet as well as portfolio sustainability and
growth.
Depending upon one’s point of view
and station in life they might think these shifts are tectonic…or
negligible. But the primary engine of
portfolio profitability has always been the entrepreneurship of innovators and
moral thinkers. Inflation will ebb and
flow, markets will surge upwards then capitulate. Margins must expand in order to help businesses
survive. Thus, our optimism about the
new paradigm outweighs any fixation upon yesterday’s business headlines.
Method or madness?
Before we even begin discussing how
to benefit from these secular economic transitions, however, we must address
the elephant in the room: people’s panic about seeing their portfolio
valuations decline by 5 to 10 percent, or more.
They must remind themselves that they
are in the “game” for the long haul; that there is no such thing as a zenith
or nadir when talking about portfolio net worth…only
trajectory, which oftentimes is uneven and overflowing with highs and
lows. Unrealized capital gains and
losses are not worth talking about except in the context of sector allocations
and prudent portfolio weightings. In
other words, even the most successful portfolios traverse a bottom-left to top-right
configuration, along with a plentitude of cyclical deviations from the mean that
are uncomfortable and frequently volatile.
Additionally, coping with one’s
anxieties can be mitigated by employing asset allocation, diversification, and
risk management strategies. Worrying
about a “total wipeout” of one’s worth is not even a possibility in a scenario
in which only 30% (for example) of assets are in the equity market. For example, if all those dollars were to
become worthless overnight (unlikely), there still remains 70 percent of your
capital invested elsewhere. While this
example might be discomfiting to some, consider again that its likelihood of
happening is quite remote. Besides, if
that “crisis outcome” leaves you uncomfortable, then by all means limit the
amount of capital invested in risk strategies to only that which you can afford
to lose. A discussion between you and
your advisor is recommended at the outset to discuss these extreme consequences.
Realistically, even a well balanced
portfolio will experience fluctuation.
Managing these parameters is the role of your advisor. Suffice it to say
that we are in a volatile moment right now….inflation, Covid, world events,
economics, social injustices. The nimble
investor uses these periods to transition his wealth to take advantage of the
ever-changing environment. We see the
current market leadership/rotation telling us that safety, yield, and growth
are paramount to an effective process.
The contraction in discretionary consumer spending is likely to continue
for the foreseeable future. Equally as likely, though, is the ever-growing
disparity of lifestyle between the well-off and those just struggling to get
by.
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