How do you think younger investors need to think about their human capital going forward? There’s an idea that when you are young, with so many years of earning power ahead, you can take a lot of risks.
My book came out last May, and I have been on the road talking to young people since then about their economic experiences. A lot of people are pretty uncertain and don’t want to take a lot of risk right now. Part of that is the lack of a solid economic foundation. Buying a house is just extraordinarily out of reach, and a lot of people use that as an economic anchor. What I try to talk to young people about is building up their skill sets and being diversified across many domains. So having experience working with AI, having experience reading through economics and certain levels of math, and so on. So if a job does pop up, they’ll be really well trained.
One thing that I tell people to do if they are just graduating is to try to get into a rotation programme so they are not just doing the same job. You can have like four different jobs at the same company. With careers and with investing, diversify and take risks when you can.
How worried do you think young savers and investors should be about the next five years or so?
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It’s a huge question. You see in consumer sentiment that people are worried. Even the rich people are really starting to get worried. And one could argue that once that happens things change. [Laughs.] Because shareholders are a protected class in the US. There is a lot of economic uncertainty even outside of policyland: With AI, we have this tech that could totally displace people. McKinsey & Co imagines it’ll displace about half of work activities. There are valid reasons to be afraid. I think the solution to that, again, is having some sort of investment — to have some sort of stability, to try and save money as you can — and to build out your skill set.
How do you feel about artificial intelligence’s impact on jobs and its potential to help our economy?
AI can be so useful. I’m bummed that our first instinct is to use it to replace art and music and all of the things that make being a human good. I don’t think that’s a wise thing to do. That’s such a small part of GDP. There’s a meme: “I wanted my AI to do laundry and dishes so I could make art. Now AI is making art, and I have to do the laundry and wash the dishes.”
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William Bernstein
A neurologist, adviser and author of The Four Pillars of Investing: Lessons for Building a Winning Portfolio and A Splendid Exchange: How Trade Shaped the World
How should investors react to these economic changes?
One thing I’ve learned is that trying to chase policy and politics with your investing just doesn’t work. My favourite example is the night Trump was elected the first time. Late in the evening, S&P 500 futures were down 4%; by the end of the trading day, the S&P was up. It’s almost always a mistake to chase the politics.
Say I made a good financial plan five years ago. Does anything need to be tweaked now?
The question always is, what’s your burn rate of cash? That tells you how concerned you should be and how careful. At one extreme is a person who has Social Security and pension income equal to their living expenses. That person doesn’t have to worry about their investment portfolio at all. Now, say someone has US$50,000 ($65,807) a year in expenses, US$1 million and US$30,000 from Social Security. They have to make up the difference with 2% a year of US$1 million. They are fine, too.
The problem is when you are relying on your portfolio for a 4% burn rate. A bad sequence of annual returns, if you are overly invested in stocks, can put you at risk of running out of money. Stocks will likely have higher returns than bonds, but it’s the concept of Russian roulette, where there is a one in six chance that you will be catastrophically wrong. The smartest thing to do is to try to defer taking Social Security until 70 to earn higher benefits. That’s the best inflation-adjusted annuity you can buy.
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In addition to writing about investing, you wrote a book on the history of trade. What’s your broader take on tariffs?
A catastrophe waiting to happen. Everyone will be hurt by this. The Smoot-Hawley Tariff Act of 1930 didn’t trigger or worsen the Great Depression but probably triggered World War II. That’s the real danger. The economic damage of tariffs will be significant, but markets will respond, and it will be self-limiting. If we have a repeat of the 2007–2009 bear market, it will be the end of Trump like it was the end of John McCain.
But to try to extrapolate that into how your stocks will do is a mug’s game. If you sell now, you never know when to get back in. If you are overweight in Magnificent Seven tech stocks, you’re 70 years old and 80% in stocks, and you have a 4% to 5% burn rate, it would be wise to reduce equities. But a 30-year-old still has an enormous amount of human capital. They should pray for a bad market so they can buy stocks for less.
Christine Benz
Director of personal finance and retirement planning at Morningstar Inc. Author of How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement
What are some things savers and investors can think about to cope with the onslaught of economic headlines?
News is coming at us quickly, and there might be a tendency to want to act upon it—new tariffs, talk of inflation coming. There is a risk that people cast their lot with a single scenario without recognising that things might change again or that you may be late. These things get priced into the market very quickly. It’s better if you can think about big, long-term risks rather than get absorbed in short-term news.
A practice an investor might turn to today is an audit. What am I paying in my fund costs? What am I paying my financial helpers, and is it earning a good return for me? You may be able to identify places where you can take action.
Are the shifts we’re seeing in the world reminiscent of past cycles? Or is there anything different now?
The deglobalisation shift feels a bit different to me. Since before the Clinton administration, we’ve had a general trend toward globalisation.
One phenomenon related to globalisation was that non-US markets seemed to move more in sync with the US. So, we saw less value in having non-US exposure in our portfolios. If we are now all erecting tariffs on each other, it seems like there is potential for economies and their markets to move in different directions. That would underscore the case for a more global portfolio, with more pieces moving in different ways.
It’s something we’ve always said, but it has been a little harder to prove looking at the numbers because we’ve seen correlations between US and non-US stocks rise over the past couple of decades. We’ve been saying keep the faith in non-US markets, the value will be there at some point. Well, maybe the value will be there now.
I’m not political at work. But there is history suggesting high tariffs are not a good idea. There are major, well-regarded people saying not to do this, but we’re still hurtling along in this way. That feels different to me. It goes along with the broader anti-expert sentiment that’s been going on for a while.
There’s a campaign to make it easier to get private equity or other private assets into 401(k) plans. What’s your take?
The timing doesn’t seem great to me. It seems like a very pro-cyclical industry. Maybe over very long stretches of time it could be good to have that exposure, but venturing into private equity now seems like not a great time. I’d expect to see PE investments move pretty much in sync with public equity markets. You don’t see the day-to-day volatility in the same way, but it’s still equity, and it will tend to move in sympathy with the economy and public stock markets.
Are there long-term risks to pay more attention to?
The need for global diversification has been very easy to ignore, but it’s been hard to ignore inflation. Paying attention to inflation is not necessarily a short-term matter. Tariffs have the potential to be inflationary, so I’d have that on the front burner, especially if you’re building your portfolio with allocations to safer assets like high-quality bonds.
I’d want to think about having some inflation-hedge investments in there, too — Treasury inflation-protected securities and I bonds—to try and defend the purchasing power from bond income. Bond ladders [bonds with different maturities] are a good way to go. — Bloomberg
