Invest yourself: Investing for the next decade

This decade is not like the last

Investing is more of an art than a science. After all, what’s worked for you in the past won’t always work in the future, so you need to be able to adapt your strategy to suit changing environments.

The macroenvironment in 2023 is a prime example of that theory. During the previous decade of low interest rates, low inflation, and relative political stability, you’d have done well by investing in stocks. (Actually, few options offer a better yield than stocks when rates are close to zero.) But 2023 is a different story: slowing growth, high inflation, and high rates have made previously steady bets – like US stocks and the tech sector – look a lot more shaky.

Mind you, that’s not necessarily bad news for investors. A more volatile environment will make stock-picking and portfolio diversification more important again. And higher rates have put the spotlight on many attractive alternatives to stocks: investment-grade credit, US treasury bills, and cash deposits will all offer significantly higher yields in 2023’s environment compared to their 20-year average. Plus, as higher rates push the cost of capital up, companies will be under pressure to sustainably generate cash while still growing, and once out-of-favor capital-intensive industries (like mining or oil and gas) could make a comeback.

Investing themes and strategies for the next ten years

Several investment themes and strategies could stand you in good stead over the next decade.

Nuclear and renewable energy

Nuclear energy has seen a resurgence ever since Russia invaded Ukraine, in turn curtailing the supply of gas into Europe. And in the search for dependable low-carbon power sources, governments are reconsidering their plans to shut down nuclear power plants. Nuclear energy and renewables are both carbon-free, after all, and they could be critical in helping nations meet the United Nations’ climate goals.

Aerospace and defense

Ongoing geopolitical tensions have led to pumped-up defense budgets around the world. Russia’s invasion of Ukraine, for one, sparked more military spending across Europe, and tensions between China and Taiwan have prompted extra military spending in the Asia-Pacific region.

Precious metals

Gold has long been seen as the ultimate safe-haven asset, with investors keen to hold it for security in case of downturns. But there are reasons to invest in other minerals. The transition to electric vehicles, for example, will be mineral intensive, with copper, nickel, manganese cobalt, rare earth elements, lithium, and graphite likely to hog the limelight.

Agriculture

At our current rate, there won’t be enough food to feed everyone in the future. So according to the World Resources Institute, food production will need to increase by 69% by 2035 to feed the growing population and expanding middle class.

Income generation

The gap between the S&P 500’s dividend yield and the US 10-year Treasury yield is the widest it’s been for two decades. That makes stocks and strategies that stand to beat the Treasury yield look extra endearing.

That’s just the start: there are plenty more compelling themes and strategies to consider. And remember, companies exposed to any of these themes could stand to benefit from long-run trends, so there are multiple ways to invest in any given theme.

How to express your investment views

The sprawling range of exchange-traded funds (ETFs) out there means you can usually find one that suits your strategy. ETFs range from ones that invest in equity indexes, bonds, commodities, currencies, or thematic stocks to more sophisticated types that leverage option strategies.

A huge benefit of ETFs – especially if you’re just starting out – is that they can provide quick diversification given the sheer number of stocks in the fund. That way, even if one stock takes a turn for the worse, the rest can help balance out your portfolio. On top of that, economies of scale mean you’ll spend less on expense fees with an ETF versus single-stock picking. And because they’re more liquid than mutual funds, ETFs can give you more flexibility to buy and sell without feeling the hit of high transaction costs.

ETFs with high liquidity, a longer trading history, and low expense ratios tend to be the most desirable ones. If you’re choosing between two similar ETFs, look for the one with a bigger fund size. Bigger ETFs tend to be more liquid and have lower expense ratios – that’s the proportion of cost to revenue.

Remember, you don’t need to get everything right straight away. Your chosen ETFs, portfolio allocation, and position sizes can all be tweaked over time as you learn more about how your assets interact with each other. You could start by building a core portfolio of passive stock and bond ETFs, before slowly adding particular stocks and additional positions over time.

Top tips for maximizing your long-term returns

If you plan to keep investing over the coming decades, these three rules could help you maximize your returns.

Diversify your investment accounts

There are two main types of accounts you’ll usually invest with: taxable and tax-advantaged accounts. The first includes brokerage accounts that aren’t subject to preferential tax treatments. The second includes investment accounts that are exempt from taxation, allow tax deferment, or qualify for some other preferential tax treatment.

Examples include Individual Retirement Accounts (IRAs), 401(k)s in the US, and Individual Savings Accounts (ISAs) in the UK. Investing through tax-advantaged accounts will allow you to maximize your post-tax returns. Those types of accounts are an ideal place for tax-inefficient assets like real estate investment trusts (REITs), actively managed funds that frequently churn their holdings, and even taxable high-yield bond funds.

Understand how to rebalance your portfolio

If you regularly buy and sell assets to maintain your original allocation, make full use of a tax-advantaged account. And rather than selling assets to reduce their weighted allocation, you could consider adding new money to underweighted asset classes.

Still, the fewer trades you make, the less you’ll generally pay in transaction costs and taxes. So consider practicing a buy-and-hold investing strategy to reduce churn in your portfolio, and give your returns time to compound.

Reinvest your dividends

You can’t underestimate the power of compounding. Dividends, though small, can drive the majority of your returns if you reinvest them over a longer period. The logic is simple: when you reinvest your dividends in the same company, you get more dividends the following year and benefit from the effects of compounding. In fact, over the last two decades, reinvesting your dividends would have generated 50% more returns in the US than if you didn’t reinvest, and almost doubled your returns in Europe and the UK.

Dividend reinvestment is a form of dollar-cost averaging. So instead of focusing on day-to-day share prices, look at a company’s long-term ability to sustain and grow its dividends. The best part, though, is that reinvesting your dividends doesn’t need to be time-intensive: when investing in funds, you can look for accumulation funds or units that reinvest for you. Or if you’re investing in individual shares, you could set up a dividend reinvestment plan (DRIP) with your broker.

Now, assuming your income grows over time, you’ll likely end up in a higher tax bracket. So if you’ve maxed out contributions to your tax-advantaged accounts, you’ll want to load your taxable investment accounts up with mostly tax-efficient investments. You could check out index ETFs with low turnover – and if you keep trading, try and do it all in your tax-advantaged account.

Investing puts your capital at risk.