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Your Portfolio in 2042

How can you increase your returns over the next 25 years? By getting ahead 
of the upcoming demographic, business and lifestyle shifts that will influence investing the most

A lot can happen in a quarter century. In 1992, the 30-year Treasury yielded nearly 8 percent. The Dow Jones Industrial Average was the decisive index, and General Motors was its largest constituent. Investors did research with clunky databases and printed periodicals, financial advisors were still called brokers and mutual funds were just starting to take hold.

Today’s landscape is radically different, reflecting a pace of technological and economic change that may be without parallel. The shifts over the next 25 years will likely be as dramatic, possibly more so. To help you prepare, consider and act on these seven trends that will shape the future of investing.


Think less about financial products and more about life goals.

» If your financial advisor is still talking mainly about finding the right balance of stocks and bonds for your risk tolerance and target return, you may want to rethink that relationship. Increasingly, wealth management will be less number crunching and more soul searching. Technology is making it possible to automate asset allocation, and you don’t need an advisor to pick an ETF. But you should look to your advisor for the bigger picture. Take a holistic view of your wealth, what it makes possible and what you’d like it to do for you and your family throughout your life and beyond. “It’s about how to manage your wealth so you can have a positive impact,” says Dan Rauchle, chief investment officer of Ascent Private Capital Management, a division of U.S. Bank that works with ultra high net worth clients.

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His team, which includes PhDs in psychology, starts the planning process by helping families craft a shared vision. From there, they design purpose-driven portfolios that generally fall into four categories: one for security, one to sustain lifestyle, one for long-term growth and one for impact. This last bracket, he says, is designed to engage and empower younger family members so they can experience investment successes and failures. “For this, we set up a family investment advisory committee,” he says.

These design-driven portfolios are a far cry from the old pie chart, and they’re the way of the future. Investors are increasingly resistant to big fees (just ask most hedge funders), and the coming years will likely see more pressure to reveal and reduce the hidden charges in most investments (see The Unstoppable Tony Robbins). Get ahead of the game by using advisors who are adapting to this new investment landscape.


Environmental, social and governance issues will be as ubiquitous as P/E ratios.

» Impact investing has taken many forms and names over the years, but the knock has always been the same: Limit your universe to do-gooder companies, and you’ll limit your returns. That may have been true of the relatively simplistic screens of yore, but times have changed, and not just because more investors, from millennials to the largest pension plans, are focusing on how companies treat their employees and impact the world around them.

ESG investing, as it is increasingly known, does more than screen out so-called sin stocks. It encompasses a wide range of environmental, social and governance factors, characteristics that, according to research from MSCI, influence long-term performance. In a sign of the times, Morningstar recently partnered with research firm Sustainalytics to give mutual funds sustainability scores based on their portfolio holdings. The funds with some of the highest scores don’t purport to be “sustainable,” but their managers are, nevertheless, in tune with this third dimension of investing. In other words, ESG is a sign that a company has forward-thinking, astute leadership—not a sign that you should invest because it makes you feel good.

“ESG is a marker for a well-run company,” says Ed Kerschner, chief portfolio strategist at asset manager Columbia Threadneedle and an adjunct professor at New York University’s Stern School of Business. “We think that a well-run company is more likely to have sustainable growth.”


An aging population puts this sector front and center.

» Healthcare spending will account for 28 percent of GDP by 2042, up from less than 18 percent today—and that’s not even factoring for longer lifespans brought on by new treatments and better technology, says Daniel Wiener, a financial advisor and editor of the Independent Adviser for Vanguard Investors. Still, many investors don’t give this growing sector the attention it deserves. “If you don’t have an overweight to healthcare today you will be sorry,” he says.

The impact of what Wiener calls “demograyphics” is huge: “In 25 years, baby boomers will be between 77 and 95 years old, and the next generation is going to be turning 65,” says Wiener, who recommends that investors allocate 20 to 25 percent of their assets to healthcare, with some of that from dedicated healthcare funds, such as Vanguard Health Care or Fidelity Select Health Care.

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And don’t forget that it isn’t just Americans who are getting older. The global 65-plus population is on track to double from 8.5 percent to 17 percent by 2050, notes Ascent’s Rauchle, making it a major investment theme for the years ahead.


Investor appetite for risk may decrease.

» There’s a potential downside to a graying world: lower returns across the board. “When you have a soaring roster of late-middle-aged people, you have a willingness to invest at lower and lower yields. But when you have a soaring roster of retiring people, the opposite kicks in,” says Rob Arnott, founder of Research Affiliates. “Our work suggests a quarter century from now there will be as many retirees as middle-aged people. The consequence could be lower asset prices.”

Arnott isn’t the only expert who thinks growth will be harder to come by in the years ahead. Stagflation, an extended period of little or no economic growth, has been a hot topic in recent years. Still, many of the same megatrends that have stymied growth—an aging population, weak productivity growth and rising debt—could be impacted by millennials, who are just beginning to enter their peak working and investing years. While the question of growth looms large for economists and strategists, investors are well advised to look beyond their core holdings for pockets of exceptional growth.


Stay concentrated on the growing global middle class.

» That isn’t to say there aren’t bright spots—including developing markets. “On a quarter century horizon, I would be a huge bull on emerging markets,” says Arnott, noting that the Shiller P/E for developing nations is half that of the U.S., while emerging market bonds yield about 6 percentage points more than those of developed markets. “You can buy nearly half the world’s GDP for 8.5 times earnings,” in a fundamentally weighted portfolio, he says.

Emerging markets will continue to experience growing pains, but the rising middle class remains a powerful force. China’s middle class is on track to surpass that of the U.S. by 2020, followed closely by India, according to the Organisation for Economic Co-operation and Development (OECD). The same trend is playing out in Latin America, where 40 percent of the population will fall into that group, based on Cambridge Associates figures.

Investors will get the most bang for their bucks if they skip the broad indices and focus on consumer stocks, says Columbia Threadneedle’s Kerschner. “A passive index is at best 20 percent consumer,” he says. Stick with actively managed funds, such as Baron Emerging Market, or a more focused ETF, such as the Columbia Emerging Markets Consumer ETF.


When investing in real estate and beyond, look further than the largest metros.

» You don’t need to be a demographer to know that cities have been undergoing a renaissance over the last decade as baby boomers swap cul-de-sac homes for urban living, and young families are staying in or near city centers. But while it may sometimes seem that everyone is moving to New York and San Francisco, real estate investors would be wise to look to smaller places like Portland, Ore., Colorado Springs, Nashville, Pittsburgh and Orlando. These more affordable and manageable areas are attracting college-educated millennials who are seeking affordable urban centers and near-in suburbs offering great schools and reasonable commutes. That trend is likely to continue in the decades ahead. Annual GDP growth in the top 30 U.S. middleweight cities is expected to lead that of the largest metros and the U.S. overall, according to the McKinsey Global Institute.

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The migration to cities is happening globally. By 2050, 60 percent of the world’s population will live in cities, according to the United Nations, more than double what it was in 1950. For investors, this has implications beyond real estate, as urbanization drives demand for everything from building materials and energy to broadband and data centers. The latter will be in increasing demand as the move toward freelance work grows. Self-employment is on pace to be the fastest-growing category of employment, potentially reaching 30 percent of the U.S. workforce by 2035, according to researchers at the Roosevelt Institute and the Kauffman Foundation.


Fresh water and farmland should be staples in your portfolio.

» No matter how much the world changes over the next quarter of a century, humans will still need fresh water to drink and food to eat. Global water use has increased at twice the rate of world population growth, according to the United Nations, and by 2040 “extreme water stress” will be an issue for 33 countries, according to the World Resources Institute.

There are many ways to invest in water. You can go straight to the source and own land with water rights, or you can invest in water utilities or infrastructure. For broad exposure, take a look at the Guggenheim S&P Global Water Index ETF, which owns 50 securities tied to drilling, treating, testing and transporting water.

Farmland is also expected to become more precious as the population increases and availability of land continues to decline; the U.S. loses 40 acres of farmland every hour, the American Farmland Trust reports. While it’s a slow grower, farmland can deliver steady returns over decades. Most investors will opt not to own the farm but to access the asset class via private equity funds that specialize in the sector or REITs, such as Gladstone Land Corp. and Farmland Partners.

“It’s going to be much more common for people to buy water-resources companies and farmland REITs,” says Andre Cappon, who runs CBM, a New York–based consulting firm that specializes in financial services. “These are themes for an increasingly crowded world.”

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