Why (on earth) invest now?

The siren calls to disinvest or simply sit in now more remunerative cash remain legion. From intimidating stock market valuations to messy geopolitics, the worry list for investors is perhaps particularly long and various at the moment. This week, we take a quick tour around the most common concerns, and offer a useful dose of context and clarity.

Geopolitics and elections

This encompasses a broad set of worries. At the crux is the sense that various regional conflicts risk spilling over into something more globally catastrophic. These fears understandably mesh with a cluttered electoral calendar in 2024.

Obviously, there can be no slam dunk rebuttals to make everyone feel more relaxed. This is a dangerous and tragic moment for the world. However, there are a couple of things for investors to bear in mind.

Plotting the highs and lows of measured geopolitical risk¹ against ensuing returns for stocks and other risky assets, points to it being an unreliable tool for investors. One good qualitative example is the rolling strife of the 1950s and 60s.² This turbulent period, with fresh memories of far worse, coincided with an economic boom in much of the developed world and soaring stock markets.

This example is perhaps useful for today, given that it was the messy birth of multiple new technologies (some of which had been gestating in one form or another for decades) that were the prime drivers of the economy, not the horror that justifiably filled the news of the time. In turn, it was these changes in the real economy that spurred investment returns higher.³

The message from history, for what it’s worth, is that an investor’s time is most profitably spent assessing the outlook for productivity growth, not the convulsing geopolitical backdrop.

The same goes for politics in the national sphere for the most part. What is newsworthy in the 24/7 battle for our flitting attention barely overlaps with what is useful for us as investors. Positive democratic shocks such as in Poland last year, where a hard right incumbent trying to fix the game was ousted, barely register in global markets over the long term. The media algorithms that feed us know our biases too well it seems.

However, outside of our bizarre preference for a diet of outrage and negativity, there is one fact that investors should remind themselves of this year of all years – It is the real economy that is the driving force behind investments. That real US, or other, economy answers to no individual. The US economy in particular is too big, complex, and various for that to be the case.⁴

The forces at work here often move too slowly and unmeasurably to be of much interest to our newsfeeds. Outside of the blockbuster technological breakthroughs, the most important part of the story surrounds the tinkering by the world’s entrepreneurs as these leaps forward are commercialised. This process is thought to lean on all sorts of unsexy stuff from the setting of institutions, to the freedom of the individual. Nothing that would knock the battle for the Oval Office off the front pages anyway.

But I can just lock in X% interest rate on deposit?

There is a novelty appeal to interest rates at the moment for many savers. Following a protracted period of nothing in many jurisdictions, worse after adjusting for inflation, the something offered by many deposits and other interest rate offerings is understandably diverting.

The first point to note is that for some people, cash savings will be the right call. Investment risk is not for everyone, emotionally or indeed financially. As an asset class, cash and short-maturity bonds are at the safer end of the investment toolkit that we use to mix and match in our multi-asset class funds and portfolios.

There are nonetheless a few other points to bear in mind.

By lending your savings to a government, bank, or other company or other entity, you are mostly aiming for a more dependable return (at least in nominal terms). You want your money back at the end of the loan, plus an interest rate to compensate you for all that you’ve forfeited in losing (some) access to those savings for a period.

This capped return is key. You are essentially saying you want to forfeit the upside from long-term global growth (that investing aims to offer) in exchange for something more predictable. While that often appears sensible when the outlook appears so riven with potholes and worse, it has mostly proved to be punishing in terms of forgone returns.

Figure 1: Cash does not gain much value in real terms

Source: Barclays Equity Gilt Study, Barclays. Data from 1899 to 2022.

The point here again is productivity growth! We are in the foothills of the fourth industrial revolution, with companies beginning to benefit from the incoming changes in the technological frontier. This week’s barnstorming results from Nvidia, thrashing already lofty market expectations, is just part of a filling evidence locker. This, if any, is the time to make sure you at least have some skin in the game (assuming your personal circumstances allow).

We generally recommend tempering that exposure all the same. Our multi-asset class portfolios blend some of that riskier upside exposure to the fast-moving technological frontier with investments designed to play a more defensive role. The point of these all-in-one slugs of constantly optimised global investment exposure is to chug away in the background, quietly compounding away.

Investment conclusion

The anchoring point in amongst all of these uncertainties is that productivity is both central to long- term investment returns and unpredictable in terms of both the when and the where. The implication of this is that there is potential value in always having some exposure to the world of investments.

This context should also help with the dilemma on the optical appeal of interest rates – this interest rate exposure is already incorporated (proportionally) into our portfolios anyway. However, more importantly by locking yourself in for a period of years, you are simply reducing the potential time your savings could benefit from the powerful global forces driving productivity (and risky asset returns) higher and giving yourself another headache when the loan has to be refreshed or reinvested.

Investing comes with risk, but once you’ve determined you’re happy to take it, it opens the door to growing and preserving wealth in a way that savings can’t do. And remember, it doesn’t have to be an either-or scenario – you can have both.

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