How to make your money work for you over the next decade
- Unlike the 2010s, expect higher interest rates, persistent inflation, and tight job markets in the 2020s.
- Experts say diversification, mid-cap stocks, and bonds offer opportunities in these conditions.
Few strategists expect the next decade to look anything like the pre-pandemic economy.
The recovery from the financial crisis was defined by near-zero interest rates, minimal inflation, excess labor, and efficient global trade.
By contrast, the economy of the 2020s will likely be defined by higher rates, persistent inflation, and a tight jobs market, said Peter Bates, the global select equity strategy portfolio manager at T. Rowe Price.
Business Insider spoke with nine professional investors, strategists, and financial planners to hear how the next decade will differ from the last 10 years — and how people can make the most of it, both through investing and by better managing their personal finances.
A new market regime requires a strategy switch
In all likelihood, the next decade will look nothing like the 2010s, said Damanick Dantes, a global markets portfolio strategist at Global X. Investors will have to contend with tight financial conditions for years instead of low interest rates and quantitative easing (QE).
"We're definitely entering a new regime," Dantes said. He added: "You're not going to get the same returns that you got out of a Covid situation or what you got when rates were artificially suppressed for a very long time, QE-driven era. Now we're entering a tighter era where rates were structurally higher than normal. So a higher base rate means that your expected returns would be lower than what you've been accustomed to."
But even in a tougher backdrop, Dantes sees opportunities for investors. International equities have stable dividends and enticing valuations that could help them outperform in the next few years, the strategist said. He's also bullish on infrastructure stocks as the US invests heavily in that area and as companies move their supply chains back home to reduce political risk.
This economic environment reminds fund manager Matt McLennan of the late 1960s and early '70s. Back then, low interest rates gave way to rampant inflation that was only extinguished by drastic, valuation-crushing rate hikes. International stocks topped their US counterparts back then, McLennan said, adding that defensive, safe-haven assets like gold also excelled.
"If there is a regime shift, then what has worked could be quite different from what does work," McLennan said.
Quality companies at a reasonable price will outperform
McLennan is positioning for a new backdrop through the First Eagle Global Fund (SGENX), which he runs with co-manager Kimball Brooker. The fund has outperformed 89% of its peers in the last 15 years, according to Morningstar, rising an average of 9.3% per year in that span.
The two stick to their investing strategy, which centers around finding leading companies with sizable profit margins, strong management teams, and tangible competitive advantages.
"Our focus is to find businesses that are stable and cash-flow generative that become available at a reasonable price," McLennan told Business Insider at First Eagle Investments' 2024 outlook conference. "And we're willing to commit capital to that business for the next decade or next couple of years, depending on the situation."
While McLennan doesn't make market calls, he's keeping a close eye on long-term shifts in the market backdrop. The 32-year market veteran, formerly of Goldman Sachs Asset Management, expects interest rates to stay higher for longer instead of returning to pre-pandemic levels. That means the growth stocks that dominated for years may come back to earth in the mid-2020s.
"If we're in a window where the cost of capital is normalizing higher, then I just would say that it makes sense, to me, to pay attention to valuation in your investing," McLennan said. "The biggest victims of an increase in the cost of capital are the longest-duration growth stories."
Don't dismiss mid caps in the mid-2020s
Nicola Stafford, who runs the Fidelity Mid-Cap Stock Fund (FMCSX), is also preparing her portfolio for stickier inflation and persistently high interest rates.
"That era seems to be over," Stafford said of the low-interest-rate backdrop. "It's a complete shift from my 20 years of investing."
Stafford focuses on mid-cap companies since they have more room for growth than large caps and are often more resilient than small caps due to their proven management teams.
"They're a little more off the radar," Stafford said of mid caps. "I think it's just kind of an interesting hunting ground for growth, for compounding over time and for really developing an edge versus the market, which is the basis of active management."
Instead of chasing the next quarter, Stafford said she spends most of her time thinking about the long-term earnings power of a company.
"By long-term, I mean three to five years out," Stafford said. "The market's not thinking about what's happening in three years — they're thinking about what's happening in three months."
There's plenty of hype about innovation in the healthcare and technology sectors, Stafford said, but she thinks it's justified. Although she didn't cite individual names she's bullish on, the second-largest holding in her fund is managed care firm Molina Healthcare (MOH).
Bates, the T. Rowe Price portfolio manager, also likes healthcare companies due to their solid long-term demand prospects. He also recommends that investors diversify away from growth stocks that thrived under low rates and instead broaden out to value-oriented names.
Examples of popular exchange-traded funds (ETFs) tied to value and healthcare stocks include the Vanguard Value ETF (VTV), the iShares Russell 1000 Value ETF (IWD), the Health Care Select Sector SPDR Fund (XLV), and the iShares Global Healthcare ETF (IXJ).
Pricey US stocks make diversification a top priority
Various valuation measures show that US stocks are richly valued. The Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio is 30.7, which is around levels seen during the height of the dot-com bubble.
Over the long-term, high valuations typically lead to poor returns. Valuations explain 80% of a stock's returns over a decade, according to Bank of America.
Cole Smead, who co-manages the Smead Value Fund (SMVLX) that's beaten 98% of similar funds over the last 10 years, says there's a high chance the S&P 500 delivers negative returns over the next decade.
There are two valuation metrics he points to: the percentage of household assets that are held in equities being near all-time highs, and the equity risk premium, or ERP, which is the expected excess return of the S&P 500 over risk-free Treasuries. Right now, the ERP is barely positive, while the long-term average is about 3%, according to Comerica Wealth Management.
Phillip Colmar, a global strategist at MRB Partners, also believes returns for the S&P 500 over the long-term will be lackluster given higher valuations. Over the next 10 years, his firm sees US stocks having a compound annual growth rate of around 1%, while non-US stocks will grow at around 4% per year.
All that said, US stocks have vastly outperformed the rest of the world over the last several years, and US stocks have tended to trade at higher valuations.
Smead sees energy in stocks in Canada also outperforming in the coming decade, as well as European banks.
Colmar likes European financials stocks, too. He thinks the euro — and by extension European banks — will benefit from weakness in the Canadian housing market and the Canadian dollar.
"When the house prices go down, households end up having to repair their balance sheets, like they did in the United States, then you end up with very weak growth, you end up with a backlash on the financial system, and so financial stocks become your short opportunity," Colmar said. He said having exposure to European financials stocks is one way to benefit from that downside without taking on the risk of shorting Canadian financials stocks.
Colmar also recommends euro-area stocks as a whole (ex-UK), given that valuations there are low relative to the US. The iShares MSCI Eurozone ETF (EZU) and the iShares MSCI Europe Financials ETF (EUFN) are two ways to gain exposure to the above trades.
All that said, US stocks have vastly outperformed the rest of the world over the last several years, and US stocks have tended to trade at higher valuations.
Look under the surface in the US
While some believe the broad US stock indexes will underperform, there are still opportunities within the market.
Bob Doll, the chief investment officer at Crossmark Global Investments and the former chief US equity strategist at BlackRock, thinks that growth-oriented areas of the market are where investors will find the best returns.
"Typically, the ones who produce more earnings growth over a 10-year period outperform, and I don't know why that wouldn't be the case again — which takes me to technology, the higher growth end of healthcare and consumer discretionary," Doll said.
Meanwhile, Smead believes capital will flow into two industries he thinks are widely seen as outdated and unloved: banking and energy. Both have underperformed over the last decade. Since November 2013, the Energy Select Sector SPDR Fund (XLE) is down 4%, while the SPDR S&P Bank ETF (KBE) is up just 25% over that time.
"Those are those old fuddy-duddy industries, you know, the ones that should be replaced by fintech and renewable energy," Smead said. "I think we're finding out really quickly that renewable energy is finding a crucifixion in stock markets, and I don't think fintech has changed the banking world in the slightest."
Bonds offer opportunities
Outside of stocks, Dantes of Global X said fixed income is intriguing after a massive multi-year selloff in Treasuries that followed a decade-long bull market. Yields are the highest they've been since before the financial crisis, and Dantes is confident that bond returns will beat cash.
"You definitely want to be actively involved in the market, knowing that you're not entering an early-cycle environment that's after a recession when you get the really juicy returns," Dantes said of fixed income. "You're still in a late-cycle environment."
Dantes said other ways to earn income include the covered call options trading strategy or master limited partnerships (MLPs), which are companies with tax advantages that are often either tied to commodities or real estate.
As rates remain high, stay invested and prioritize paying down debt
Regardless of what happens in markets and the economy in the next decade, investors should follow time-tested strategies like dollar-cost averaging and taking advantage of 401(k) matching at work, said Michael Sheldon, the chief investment officer at RDM Financial Group.
Dollar-cost averaging means investing smaller chunks of money periodically instead of attempting to time the market. Those who dollar-cost average in a 401(k) plan enjoy tax benefits and also often receive additional contributions from their employer through a matching program.
"Markets are going to have their ups and downs over time, but we also know, importantly, that equity markets over the decades have proven to be the best way for investors to create wealth in financial markets," said Sheldon, who's also a Certified Financial Planner (CFP).
Investing early and often is especially vital since Sheldon said there's a serious chance that the US won't be able to fully fund programs like Social Security in the next decade.
"Given the uncertainty of where Social Security is, that just means that younger adults — unfortunately — need to save as much as they can for future retirement," Sheldon said.
However, investing and saving shouldn't preclude people from paying down debt, Sheldon said — especially in an era of higher-for-longer interest rates. Borrowing costs on everything from credit cards to cars to houses will likely be elevated in the next decade, so Sheldon advises reducing debt as soon as possible, starting with whatever has the highest interest rate.
Invest with taxes in mind
Chris Chen, the founder of Insight Financial Strategists and a CFP, believes investors with a long-term horizon should consider direct indexing. This means instead of buying an index fund like the SPDR S&P 500 ETF Trust (SPY), one buys the stocks that make it up individually.
The main advantage of doing this is to reduce the tax burden of gains the portfolio makes, Chen said. One can lock in positive returns of individual stocks without paying taxes on the gains by selling other individual stocks that happen to be down at the time. Investors can then immediately buy back the stocks they sold at a gain, and can do the same for the down stocks after a 30-day waiting period. This process can then be repeated as desired.
Another long-term tax strategy Chen recommended is investing in more growth-oriented assets through a Roth IRA, which is taxed upfront. Meanwhile, one can invest in more stable assets like bonds through a traditional IRA, where gains are taxed upon withdrawal.
This is because growth-oriented assets will tend to deliver higher returns over the long-term than bonds will, making it more advantageous to let them grow tax-free in a Roth IRA and avoid future taxes on substantial returns. Bonds will tend to produce less impressive returns, so it's better to have them taxed on the back end.
This makes most sense if you're able to fill both accounts on a yearly basis. The maximum yearly contribution in 2024 for both traditional and Roth IRAs is $7,000. For people over the age of 50, it's $8,000.