The Financial Industry is Changing—Here’s How You Can Keep Your Portfolio Relevant

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“The individual investor should act consistently as an investor and not as a speculator.”

Those words were first spoken by Benjamin Graham, hailed as the “Father of Value Investing” and the “Dean of Wall Street”. What separates an investor from a speculator, according to Graham, is the use of thorough analysis when making investment decisions.

Even though he spoke these words many decades ago, they still hold true today. The financial landscape is constantly evolving, which is why intelligent investors are always updating their knowledge to stay ahead of the curve and keep their portfolios relevant.

As we move deeper into 2018, here are three important trends that you should take into consideration when updating or creating your investment portfolios.

Trend #1: Rising interest rates

In the wake of the global financial crisis at the end of the last decade, central banks everywhere loosened monetary policies in order to stimulate economic growth. For years, interest rates, particularly in the developed world, remained at rock bottom—and even negative—levels.

Recently however, interest rates have been on an upswing. The US Federal Reserve has raised its federal funds rate six times since the financial crisis, with the last rate hike occurring in March 2018. This trend is widely expected to continue. The Bank of Canada, for instance, has raised rates three times since July 2017, with two more hikes expected in 2018.

While rising interest rates are a sign of a recovering economy, too rapid an increase can risk jeopardizing said recovery and suppressing growth. What follows is a delicate balancing act.

What this means for your portfolio

Bond prices have an inverse relationship with interest rates. As such, you should expect continued downward pressure on bond prices as monetary tightening continues. Over the long term however, bonds, as well as cash market funds, may become more attractive.

While stock prices are not directly affected by rising interest rates, tightening monetary conditions make it harder for companies to raise funds and repay debt. Companies that have relied on such easy access to funds in the past may also run into trouble. On the other hand, certain sectors, such as banking and insurance, have traditionally benefited from rising interest rates.

In short, whether you’re a cautious investor or you’re willing to take on high-risk investments, you should examine your equity portfolios carefully to see whether they have any companies that were only thriving due to the low interest rate environment.

Trend #2: The return of emerging market economies

For many years, long-term investors with the capacity to invest in the S&P 500 index benefited greatly. Over the past 10 years, assuming reinvested dividends, the S&P 500—which indexes 505 stocks issued by 500 of America’s largest companies—generated an annualized return of 9.84%. By contrast, other indexes fared much worse, including the MSCI Europe Index (2.51%), the MSCI Emerging Markets Index (2.17%), and the MSCI Far East Index (4.22%).

But in the last year, the MSCI Emerging Markets Index and the MSCI Far East Index returned 21.71% and 22.49%, respectively. The S&P 500 had an annualized return of -0.76%. While this trend is far from a guarantee of market performance, it is certainly worth exploring how other emerging markets may provide valuable investment options at a time when the S&P 500 is performing below its long term average.

What this means for your portfolio

With political uncertainty and tensions rising in the US, you may want to start paying the emerging market economies more attention. Some common ways of doing this include exploring emerging market ETFs and investing in stocks that do a lot of business in those markets. Ultimately, diversifying your investments with different geographical locations is always a good idea, and will help to ensure that your entire portfolio isn’t affected by global or political crises in a given area.

Trend #3: Alternative assets and the crypto economy

The global financial crisis created doubts in many investors’ minds as to whether a portfolio of only traditional equities and fixed income instruments was good enough. Investors now have increasing access to alternative asset investments, which have been steadily gaining in popularity.

The figures speak for themselves: total alternative assets under management increased to over $4 trillion by the end of 2016, a near 10% increase. Sovereign wealth funds now hold 23% of their assets as alternative investments. PwC expects $18.1 trillion in global alternative investments by 2020.

When speaking about alternative investments, the rise of the crypto economy cannot be ignored. While it’s true that the cryptocurrency market is still volatile, investors shouldn’t lose sight of the fact that it is ultimately the underlying blockchain technology that gives it lasting value. The crypto economy is still in its infancy, and it could become as valuable and ubiquitous as the tech economy is today.

What this means for your portfolio

If you are willing to do the necessary research into these alternative investments, you may be able to make better returns than those sticking to the traditional model. Before making such investments, you should carefully consider and manage your risk tolerance levels. For example, investing in Neptune Dash allows you to gain exposure to the crypto economy without needing to hold any cryptocurrencies—which may be the smartest play for mid-risk or low-risk portfolios.

The financial industry is ever-changing, but keeping an eye on ongoing trends can help you get ahead of any dramatic market shifts. Instead, take the time to figure out how these trends present exciting investment opportunities outside of the “traditional” way of doing things. Sure, some investment habits stand the test of time. But with technology rapidly changing the way we do business and new emerging markets flourishing in unexpected ways, old investment strategies are no longer sufficient for the new financial landscape. Smart investors will be wise enough to change their investment habits—and their portfolios—accordingly.

 

Learn more about how the cryptocurrency market fared in Q2 and how to start investing in Dash today.

Photo Credits: Shutterstock / Wit Olszewski

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