Building a Diversified Portfolio for the Long-Term – Part II

This century is unlike the past one for investors

May 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Most investors have portfolios that are ill-equipped for the long-term
• Negative demographics will lead to significant changes in the economy and society
• These changes are happening at a glacial pace, but they are happening

INTRODUCTION

One of the core challenges of investing is escaping the constant fog of war that creeps upon us when following the ups and downs of markets and the economy. The long-term goal should be crystal clear for most investors: achieve positive real returns. Ideally with relatively low volatility on the portfolio level as we can’t stomach large drawdowns. 

The issue is that the financial world, especially the media, is focused on the short, rather than the long term. The irony is that it is much more difficult to invest for the former than the latter. It is almost impossible to predict the return for the S&P 500 for the next 12 months, even if every strategist on Wall Street has made a forecast for exactly this. In contrast, stock market returns are a function of valuations in the long term, so there is a lower probability of being wrong when calculating the approximate return for the S&P 500 for the next 10 years.

Clarity of mind and discipline are essential traits for successful long-term investing. However, it is also critical to retain the flexibility to realize when the world is changing structurally, even if this is happening only at a glacial pace.

We recently outlined a portfolio for the long-term as the world is evolving, and will continue to explore this further in this article. 

Related research: Building a Diversified Portfolio for the Long-Term

THE LONG-TERM OUTLOOK FOR RETURNS

Ultimately, investing is largely a bet on economic growth. If the economy is booming, then earnings and valuations tend to increase, which benefits stocks, private companies, startups, and real estate markets. Even bonds benefit given lower default risk.

However, economic growth largely relies on productivity increases, which have been scarce over the last decade, and the g