Rising tide lift all boats still?
When things are doing well with the economy and the stock market, an investor can safely assume their overall investments could go up in value. A good analogy used by mainstream finance media is “a rising tide lifts all boats.” This generally depicts that most investments will go up in value with a varying degree of performance. However, in observing 2020 trends this analogy doesn’t truly reflect the recovery we have seen this year.
Passive investing, which means buying index funds that just capture broad stock market returns, has done very well in the last few years. I used to work for Vanguard, the pioneer of index funds, and was able to see firsthand this movement in the seven years I worked there. For most people, especially those closer to retirement or just getting started with investments, this can be a great way to make money while taking less risk. For someone that doesn’t have the time, willingness, or ability to pick individual stocks, this is a great way to grow your money over the long run.
With that being said, this worldwide pandemic has shown the cracks and flaws of solely being a passive investor. Certain industries within the economy were harmed very differently than others during the recession. For example travel, energy, and leisure were hit very hard. For those stock pickers who invested in companies that were able to sidestep some of the economic damage more effectively investors were rewarded with better returns. In my opinion this could last longer than people think as younger investors such as my fellow millennials and generation Z are taking a different approach compared to their parents. They want to have a stake in exciting companies and not be tied down to holding other investments in index funds. Vanguard, as of the third quarter 2020, according to Barron’s is expected to only bring in 47% of the same cash inflows from index funds as it did last year. Now people surely are struggling this year and can’t add to their investments, or possibly needing the money to pay other bills.
My opinion is people, especially younger investors, are taking a different approach. They love new companies like Robinhood who give them a chance to buy fractional shares of companies. Retail investors have access to tons of information on the internet to help them make informed decisions if they utilize critical thinking in making their investment decisions.
Now everyone has different time horizons, circumstances, and risk tolerance that can drive what strategy makes sense for their situation. I formed my practice to help all people with sound financial advice, not just wealthy people. I would rather help someone young and willing to make sound early decisions to help them build their wealth in the most efficient way. The shakeout from the pandemic will take some time as some new behaviors and norms could be changed far into the future. Due to that belief I think this change in strategy will be a trend, not a fad.