The storm before the calm: the case for investor optimism

How we see the world

It seems reasonable to suggest that the world is not at its best right now. It also seems reasonable to suggest that this has been the case for some time and is likely to remain so for the foreseeable future.

The ravages of the COVID-19 pandemic have segued into rampant inflation, skyrocketing interest rates, fractured supply chains, energy shortages and a cost-of-living crisis. In tandem, geopolitical tensions are arguably at their highest since the darkest days of the Cold War.

Meanwhile, evidence of entrenched unsustainability continues to mount all around us. The far-reaching risks posed by climate change have not gone away. Ecosystems and biodiversity are still in freefall. Many aspects of food and agriculture increasingly appear outdated, imprudent and unfit for purpose.

Both as investors and as global citizens, we might easily survey this daunting array of threats and fear the worst. Yet it is worth remembering that our greatest challenge often lies not in what is happening in the wider world but in what is going on in the few inches between our ears.

Our own perceptions, biases, fears and subjective interpretations are key to how we process events. They are also key to our chances of long-term financial success, because they can blind us to a number of realities if we allow them to overwhelm rational thought.

One of these realities is that prolonged periods of turbulence are part and parcel of growth capitalism. Another is that the proven principles of sound investing can be applied in any situation. And a third, crucially, is that threats invariably go hand in hand with opportunities.

Confidence in continued growth

Broadly speaking, long-term investors are urged to hold their nerve in the face of turmoil. Exiting the markets is seldom a wise course of action, as it invites missing out on recovery.

Bank of America recently underlined this point by studying S&P 500 data stretching back nearly a hundred years. An investor who missed the index’s 10 best days each decade since 1930 would have earned a total return of just 28%, compared with close to 18,000% for an investor who stood firm throughout[1].

Relatedly, research has also shown that the S&P 500 delivered a compound annual average growth rate of 10.7% during the 30 years up to 2021[2]. This period witnessed some notable ups and downs, with especially dire years frequently followed by particularly good ones.

In 2002 the index returned -22.10% – largely as a consequence of the bursting of the dot-com bubble – only to bounce back to the tune of 28.68% in 2003. In 2008, at the peak of the global financial crisis, it returned -37%; in 2009, as markets rallied from the depths, it returned 26.46%[3].

The fact is that every generation experiences its share of market mayhem. Look at a chart of volatility over the past century and you will see a timeline punctuated by sizeable spikes – testament to shocks such as the Great Depression, World War Two and Black Monday[4].

Importantly, you will also see that the overall trajectory has been one of growth. This alone should give investors comfort and confidence as we confront the “perfect storm” of today.

What, when and how

Yet it is not simply a question of sitting tight and patiently awaiting a turnaround. The opportunities to which difficult circumstances give rise must be identified and seized – and they are also likely to hold different attractions for different investors.

Someone on the brink of retirement, for example, will not necessarily benefit from the same approach as someone with 40 years still left to work. This is why investors should take account of their own investment horizons when seeking to optimize their portfolios.

To put it another way: each of us should reflect on what we would like to achieve and, just as significantly, when we would like to achieve it. Mindful of these vital concerns, we can then reflect on how we might accomplish our objectives.

Investors with a focus on the relatively short term, for instance, may be drawn to money market funds. These have finally started generating decent returns after years of near-zero performance – a barren period that culminated in billions of dollars’ worth of withdrawals in 2021[5].

Fixed income is also showing renewed promise. Inflation-indexed instruments such as US Treasury Inflation-Protected Securities might not deliver spectacular capital growth, but they have become a popular means seeking of guaranteeing a real yield as central banks battle to bring economies under control.

A regional perspective on asset allocation can also be useful. The Middle East offers an illustration: the wealth of the six Gulf states is expected to grow substantially during the next four years, in no small part thanks to Western sanctions against Russia[6].

Diversification and disruption

Looking further ahead, I believe much of the solution for many investors could lie in equities – in my view, US stocks foremost among them. A combination of factors – including a productive and mobile workforce, an innovative and varied business landscape and the dollar’s undisputed role as a the world’s reserve currency – means the supremacy of US earning power in this arena has persisted.

This is not to imply that geographical diversification is undesirable. On the contrary: it is critical. But to me it is hard to ignore that the cumulative returns from US equities since the meltdown of 2007 and 2008 have comprehensively outstripped those from other markets.

Beyond equities, real estate and infrastructure can be powerful sources of long-term portfolio diversification. They are also acknowledged as relatively reliable inflation hedges, mainly because they are closely tied to the Consumer Price Index and similar indices.

There may, though, be merit in selectivity in this space. Shorter-term leases – such as might be found in the likes of rented properties, hotels and multi-family living –may provide more scope for regular inflation-linked adjustments.

Depending on our horizons, we might also base our investment decisions on where we believe markets – and the world as a whole – could be several decades from now. This obliges us to discern the disruptive dynamics that are likely to shape our day-to-day lives over time.

Here, too, crisis is pivotal. Disruption is a corollary of innovation, which in turn routinely stems from the demands of extraordinary contexts. Humanity has a lengthy record of innovating its way out of trouble, and it is a record that we desperately need to maintain today.

Shaping a shared future

The journey to net zero is perhaps the most obvious illustration of the unparalleled scale of innovation and disruption now needed. It is generally accepted that transitioning to a sustainable global economy by 2050 will involve an unprecedented transformation and that this, in turn, will require investment totaling hundreds of trillions of dollars[7].

Radical reform of the food system will likely be a fundamental component of the shift. Food technology and agricultural technology – foodtech and agtech – are already dramatically remodeling this sphere.

Take precision fermentation – a cutting-edge process that “programs” microorganisms to produce specific proteins, enzymes, vitamins, fats and other ingredients. In 2000 it cost around $1 million to produce a kilogram of one type of molecule through this method, but it may soon cost less than USD 10. In my opinion, the meat and dairy industries as we know them could conceivably disappear within years.

Of course, tech is at the heart of almost every form of disruption. The march of digitization underpins a huge range of both established and prospective growth areas, including cloud computing, cybersecurity, digital payments, geofencing* and – as discussed in an earlier piece – the metaverse. The possible is now being redefined almost relentlessly.

All things considered, then, it is right to reiterate that the world is not at its best – at least in many respects. Yet it is equally right to observe that every challenge, every crisis, brings not only opportunities but a platform for game-changing advancement.

We should recognize this latter truth – again, both as global citizens and as investors – because it is central to how we might view the way ahead. Caution is essential, not least amid the current tumult, but so is a healthy dose of informed optimism.

Disclaimer: The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment-making decision. As with all investments, there are associated inherent risks. Past performance does not predict future returns.

[1] See, for example, CNBC: “This chart shows why investors should never try to time the stock market”, 24 March 2021.

[2] See, for example, Motley Fool: “S&P 500 index fund average annual return rate”, 30 June 2022.

[3] Ibid.

[4] See, for example, Motley Fool: “Is today’s market more volatile than in the past?”, 22 February 2016.

[5] See, for example, Financial Times: “ ‘The return of cash’: money market fund sector perks up on rising rates”, 19 July 2022.

[6] See, for example, Boston Global Consulting: “GCC’s financial wealth to grow by 5.2% annually, reaching $3.5 trillion by 2026”, 27 July 2022.

[7] See, for example, McKinsey & Co: The Net-zero Transition: What It Would Cost, What It Could Bring, 2022.

*Geofencing refers to the automated triggering of an action by crossing a geolocated boundary on the surface of the earth or in the air.