A New Era of Investing Is Here
We’re living in some markedly different times. The obvious changes are easy to spot—masks on faces, cashless transactions, the meteoric rise of online commerce. But there’s a sea change afoot in the world of investing as well.
Sustainability is at the forefront of investors’ minds. So too are opportunities in the realm of fintech, brought into stark relief after a year and a half of COVID-related adjustments to how we live and work. Top it off with Wall Street volatility and you’ve got the right conditions for investors to shake things up.
Investors have more opportunities than ever before. Entire sectors once out of reach to the typical investor are now accessible. A new era of investment democratization—paired with dynamic new investment types—provides more options to more people.
The Rise of ESG and Sustainable Investments
More than a third of all assets in Australasia, Canada, Europe, and the United States are in ESG-related holdings, according to one recent study. This accounts for $35.3 trillion across five of the world’s largest investing markets.
The appetite for sustainable investments has grown significantly from where it was only 10 years ago. Not only have ESG investments gone mainstream, they’ve also prompted businesses to adopt sustainable practices of their own.
When the United Nations launched Principles for Responsible Investment in 2006, the group had 63 committed investment companies on board, representing $6.5 trillion in assets under management. This number grew to incorporate 1,715 investment companies by 2018, representing $81.7 trillion in AUM. Signatories in the United States increased by a little over 20% in 2019 with 464 new companies signing on.
What remains to be seen is what companies will do to actually make good on their promises. 2021 is the hottest year on record; the role of businesses, and the individuals who run them, is critical if we are to mitigate our ongoing climate emergency. And if they choose not to, it will be up to investors to drive change—be it through their wallet or through proxy fights.
Alternative Investments go Mainstream
Equities investors have had to contend with larger, more frequent market fluctuations since 2018. This year is no exception: markets lost 1.4% off the S&P 500 over a three-day span in May. July witnessed a 1.3% drop in value, too. Then there was a 2.7% drop across three trading days back in July. Yet so far, August saw the S&P 500 hit a record close. Retail investors have to have a strong stomach in order to maintain a stock-heavy portfolio these days. That’s why many have sought other opportunities to make gains or, at the very least, unique hedges beyond the usual options like real estate or gold.
Most alternative investments were out of reach for retail investors until recently. For some, it was the money required; for others it was regulation that kept crowdfunding opportunities limited. New trends and regulation changes have made alternative investments much easier for retail investors to access.
FinTech has made it easier for people to invest in assets that were once price-prohibitive. Fractional investing opened the doors for retail investors to have a stake in big-ticket assets such as commercial real estate, farmland, and even collectibles. Now you can include shares of a Honus Wagner baseball card among your mix of ETFs, bonds, and stocks.
Granted, not every alternative investment is as unique as a baseball card. Alternative investing’s spectrum goes from slow growth and long-term investing to high-risk opportunities. The big takeaway here is that there are more mainstream investors getting in than ever before. And for many, this is a brand-new world of assets.
The FinTech Revolution Keeps Going
The shockwaves in alternatives stems from the broader FinTech effect, and noo part of the markets have been spared from the revolution.. Brick-and-mortar banks had to make major investments in their own fintech stack or face losing customers to digital-first banks. Mobile banking is here to stay, which will change how financial giants operate.
This is just one example. FinTech is changing the way individuals invest, namely by making different investment types more accessible, as well as the kind of assets in which they can invest. Incumbents in the investment space used to charge high fees to trade. Those days are over.
The fintech sector is on its way toward exceeding $6.68 trillion in transactions by the end of this year. This figure leaps to $10.52 trillion in four years. For context, the sector only accounted for just over $3 trillion back in 2017. This revolution is perhaps the biggest of them all in terms of long-standing effects.
The Democratization of Assets for Retail Investors
Fintech in itself is revolutionary; how it’s made it easier for retail investors to access a broad array of assets is another unto itself. Startups and financial innovators make it less expensive for retail investors to make trades, but more importantly, they make out-of-range investment types eminently more easy to acquire than ever before.
The COVID-19 pandemic changed seemingly set-in-stone rules about how markets work—and how investors play in it. Now retail investors feel emboldened to enter the market in brand-new ways. Options trading wasn’t feasible for your average investor unless they wanted to go for broke (literally or figuratively) and become a day trader. There were $14.83 billion contracts traded during the first quarter of 2021, with Q2 dipping slightly with a total of $14.08. These still blow away June 2020's tally, just shy of %11.66.
Other assets, such as alternatives and non-fungible tokens, also broaden what, how, and when individuals can invest. Now that tech has emboldened more people to enter the market from different angles—and with different investment types—there’s no denying these changes will have a massive impact for decades to come.
The End of the 60/40 Rule
The old wisdom that a modest portfolio should comprise 60% stocks and 40% bonds. The size of the market and the low returns on bonds makes smart investors look for balanced portfolios that can still generate enough of a return to make it all worthwhile.
Markets aren’t what they used to be when the 60/40 rule first became popular. The idea first gained momentum in the 1970s but can trace its roots to the mid-1950s. The stock market of today doesn’t look the same as it did 60 years ago, however. The variety of investment funds, alternatives, and quant-based investing changed the underlying ways in which markets move—and how investors can generate returns. Plus, the Fed’s COVID response brought the country’s money supply up from $6 trillion to $18 trillion, making bonds all but worthless to investors.
Nowadays, smart investing means people have to seek out alpha beyond stocks and bonds. Modern portfolio mavens need to think about the big, broad world of investing that’s broken open. A new era of investing is here; now it’s up to companies and individuals to go make the most of it.
Our new investing epoch is sure to see other major disruptions and developments—some of which we can’t even forecast yet. But one thing’s for certain: investors have more power than ever before to push the limits of what their dollar can do.
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Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.