So are Stock Market indices chasing their tails?
The repeated return to previous values on the indices may simply reflect that we are in a transition period to a whole new raft of technologies and ways of doing things, which has been amplified by the crisis of 2008. It may be that equity performance does return to the style of ever increasing valuations.
Yet if valuations do resume a more constant upward trajectory, it is likely to be in a world of drone deliveries, personalised and personal medicines (2016), solar panels in a plastic film we put on windows and buy from the DIY store (2017), 3D printing (2016), Driverless Cars and Lorries, Drone Ships that are controlled remotely like a military drone (2020), Robotics, Artificial Intelligence, 2 hour flight times to Australia from the Northern Hemisphere and an African population that makes up 25% of the World population (currently 16%). In this world, we need to understand which investment management strategies continue to be of value and which needs to be updated.
Driverless car companies will be software companies as the critical part of the vehicle will be the ability to drive on it's own and to be able to navigate not the actual engine and body shell. These functions (engine and body) will be sub contracted to third party suppliers who may supply many different car brands. The basis for valuing a car company will therefore need to be changed from a manufacturer to a software company.
The Key Performance Indicators (KPIs) of these new companies will be different than before. Take as an example an Artificial Intelligence company. It is a software company. So will it be valued as per a Microsoft or a Google on what it can do, e.g. better search functionality or more efficient operating systems? Certainly to a degree. Yet the most important KPI, especially in the early years of these companies, will probably be what the product cannot do. For example, imagine a robotic vacuum cleaner (available now) being fitted with AI and believing it could become a driverless car. A somewhat humorous example but others are less so. I cannot imagine that many of us would want a robot used for spot welding in the manufacture of cars being fitted with AI and then believing it could be a brain surgeon!! These two examples demonstrate that making sure that the "cannot" element of AI products will probably be as important as what the product "can do" in determining a company's share price. We will need investment managers that understand these issues and build them into their investment processes.
Change and the need to manage our personal affairs in this context.
"It is not the strongest
of the species that survives, nor the most intelligent that
it is the one that is the most adaptable to change"
Knowledge of the different planning strategies for each stage of your life is very powerful. How do you build an adequate retirement pot? What would happen if there is an economic crisis just before your retirement? How long will your money have to last? What do you want to leave your family and how do you execute succession planning?
Retirement will last perhaps 30 years and we cannot expect the World, the law, taxation and the economic situation to remain static over this period. Now more than ever, there needs to be preparation for living in retirement and this transition may take several years. The next generation will need to start their planning early but this can be an education process in investment planning to help them manage the wealth they will inherit from their parents and grandparents.
What can, and should, be considered separately is the "where you are" in your stage of retirement. In broad terms there are four stages as follows:
- End of Retirement/Succession Planning
- In retirement and requiring income
- Transition to retirement
- Retirement is a long way off
These four stages are not marked by set age ranges. They do, however, suggest that different strategies should be adopted for each stage. This is again important. If you have taken big investment risks in your thirties that have paid off, there is the temptation to try to replicate the portfolio strategy in retirement. In your younger years you can, and should go for growth strategies and longer term pay off periods. This allows you to invest more in the geographical and technological change companies. In retirement, these longer term plays should only be used to help your portfolio keep up with inflation. In retirement, you have to make your capital last!!!
Medical Costs need to be accounted for or insured. Don't count this amount in your income pot as if you spend your income pot on medical expenses you will find yourself suffering financial hardship as well as medical hardships.
In the next and final article we examine the strategy for managing your wealth for retirement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.