Investing in the 2020s. A detailed guide for the new year

With the dawn of a new decade, many are looking forward to what the third decade of the millennium has to offer. Despite fears of a trade war, certain fundamentals undergirding the global economy dictate that growth cannot go below a certain level, barring a cataclysmic event.

Two significant forces will undoubtedly influence investment trends as the decade unfolds. The first will be increasing the importance of emerging economies as drivers of global growth as well as consumer demand. The other major trend is that of exponentially improving technology that will open up an avenue of investment, not even thought possible just a few years ago.

The average investor of today needs to realize that certain pillars that investors of previous decades were able to rely on no longer apply in the present time. This is what makes the investment landscape more exciting and, at the same time, more treacherous.

Virtual advising

One of the most significant changes the average investor faces is the option to put their trust (and money) in one of the leading robo advisors, instead of an actual person. Traditionally, would-be investors would need to employ the services of a physical, financial advisory and meet with one of their certified personnel to receive a consultation and have an investment plan drafted.

Furthermore, once that was finalized, you would have to go through a brokerage to execute whichever trades the investment plan called for. In both instances, you might be facing hefty advisory fees and sales charges, respectively, before your money has any chance to start working for you. This also eats away at your return. Although it is understandable given that people need to pay their bills, this nonetheless motivates people to search for greener pastures.

With robo advisors, investors have found just that; one can craft financial plans or buy and sell financial products whenever they wish, all from the comfort of their own homes. The benefits of a good robot advisor are manifold.

For one, the cost of financial planning is greatly reduced with less overall overhead costs. In turn, the cost of providing financial advice to investors is dramatically reduced. In a competitive industry like this one, these savings are naturally transferred to the customer. Sales charges are also almost non-existent because you can now place those orders through an app in most cases.

Higher returns and better diversification

Because of the significantly reduced cost of investing, this inevitably means that your overall rate of return must go up for every level of risk. This is a very potent benefit, especially for long-term investors. If you are a young investor looking to start saving for retirement over the next four decades or so, any difference in your rate of return, especially if your portfolio’s risk profile remains unchanged, will compound over that period. 

For example, if the cost savings you avail from switching to a robo advisor totals to just a couple percentage points in return per year, that means in 35 years’ time, the amount you will have accumulated will be double what you would have had if you had a physical advisor.

On top of this, the greater amount you invest will enable you to expand the diversity of your portfolio. You will be able to acquire a greater variety of financial instruments that will offset non-systemic risk. Statistics show that a portfolio should have at least 25 different financial products within it to approximate market risk. Having more money to work with as a result of going with a robo advisor will help significantly in this regard.

Emerging markets take center stage

In terms of Purchasing Power Parity, PPP for short, the G-7 economies were eclipsed by that of the E-7 economies sometime during the middle of the last decade. With differentials in growth rates showing no signs of narrowing anytime soon, this gap will only continue to grow through at least the middle of this century. 

From Latin America to the Western Pacific, tearaway growth has lifted numerous countries from abject poverty to global prominence over the last two generations, and many still have the fundamentals in place to continue their growth spurts for many years to come. This creates many investment opportunities across the risk spectrum.

The last stand of arbitrage

The phenomenon of arbitrage is one of the most prominent fantasies investors go to bed dreaming about. Arbitrage, defined basically as a market imperfection where the return on investment far outstrips the risk, is very rare in developed markets. This is because developed markets have been so heavily analyzed by market watchers and their army of computer programs, that everything has been more or less priced in line with their line of risk.

The same cannot be said in emerging markets. Even though analysts have started descending on emerging markets in droves to put accurate prices on everything, this process is still far from over. In the meantime, intelligent investors can still get their share of the action if they know where to look. 

The only constant in the 21st century is changing. Those who understand and accept this as inevitable will be able to position themselves to benefit fully from the changes that are taking place around the world and secure a future for themselves and their descendants.