October 1, 2023
Yes, artificial intelligence (AI) will gradually replace most financial advisors. This will not happen right away. In the next few decades human advisors will continue babysitting and training AI in the art and science of financial advice. Eventually, specialized AI financial advisors will take over the industry. Most humans will welcome the change. Financial investing is about creating financial wealth not about preserving the status quo.
This article goes over investing, types of wealth, financial wealth, role of financial advisors, common types of investments such as stocks, bonds, and real estate, stocks vs real estate, and future AI financial advisors.
Investing
Investing refers to the act of allocating resources, usually money, into an endeavor or asset with the expectation of generating income or profit over time. The main goal of investing is to grow wealth over time.Wealth refers to the abundance of valuable resources owned or possessed by an individual or entity. Humans seek wealth as a proxy of seeking the perceived pleasure that it may bring. Never forget that humans are animals. All animals are controlled by pain and pleasure. Animals are genetically programmed to avoid pain and seek pleasure.
Monetary of financial wealth is what most people typically think of when discussing wealth – an abundance of money or possessions of value. It can be in the form of cash, bank deposits, investments (like stocks and bonds), real estate, and any other tangible or intangible asset. There are other types of wealth such as physical wealth (e.g. health, fitness, age, esthetics, race (in a racist world), etc.); intellectual (knowledge, skills, expertise; emotional (e.g. happiness, stability, temperance, etc.); social (friendships, relationships, political connections, etc.); cultural (heritage, language, customs); and even spiritual (e.g. faith, mythology, gullible networking, etc.).
Financial wealth
Financial wealth
Financial or monetary wealth is the easiest to measure, and the easiest for AI to take over. Financial wealth is measured by simple arithmetic calculating net worth – the difference between the value of assets and the value of liabilities. On a larger scale, wealth can also be measured in terms of gross domestic product (GDP) of nations, value of stock markets, value of real estate, purchasing power of national fiat currency, etc.
Wealth is relative in many respects. For instance, a person considered "wealthy" in one country or community might be seen as "average" or even "below average" in another. The perception of wealth can also change over time, influenced by economic, societal, and cultural shifts.
The distribution of wealth varies widely among societies and is an active topic of social debate studied by economists and sociologists. In many societies, wealth is concentrated in the hands of a few, leading to discussions about inequality and its impacts. Wealth in the human world is also concentrated based on the social construct of race due to history of racism and colonialism in globalization.
In democratic societies with open market economies, financial wealth can be created in numerous ways. Typical ways include salaries, savings, investments, inheritances, marriages, and entrepreneurial ventures. Once acquired, most humans seek to preserve and grow their wealth through strategic investing, wealth management, tax avoidance, and wealth transfer mechanisms like trusts and estate planning. There are also many illegal ways of creating financial wealth through profitable criminal enterprises, and ways to hide and preserve illegally obtained wealth such as money laundering and tax evasion. Of course, criminal activity is never recommended. The risk and cost of being caught by authorities or being harmed by other criminals exceed the potential rewards.
Types of Investments.
Types of investments include stocks, bonds, real estate, commodities, and alternative investments.
Stocks represent ownership in a company, or in a basket of companies (e.g. mutual funds and exchange traded funds). Bonds are essentially loans made to either government or corporate entities. Real Estate involves purchasing ownership interest over real property, either for capital appreciation, rental income, or both. Commodities are physical goods like gold, oil, and agricultural products. Alternative investments include art, wine, antiques, and any tangible or intangible asset with the chance of increasing in value over time.
Investing typically involves a longer time horizon than trading. While traders might buy and sell assets within short time frames (from milliseconds to months), investors typically buy assets with the intention of holding them for several years or even decades.
Investing can be active or passive. Active investing involves selecting individual investments based on research, analysis, and a belief that they will outperform the market. Passive investing involves buying a broad cross-section of the market, and holding onto it for the long term, typically through index funds or ETFs. The idea is not to beat the market but to match its performance.
All investments come with a risk of loss. Generally, the potential return on an investment is commensurate with the risk involved. Higher potential returns usually come with higher risk. It's essential for investors to assess their risk tolerance and make investment decisions accordingly. Since some assets will appreciate and others will depreciate, diversification is a fundamental principle of investing. Diversification involves spreading investments across various assets or asset classes and over time to reduce risk. The idea is that positive performance in one investment can offset negative performance in another.
In essence, investing is about acquiring property rights expected to appreciate over time. Humans invest for various reasons, including generating income, saving for retirement, preserving or growing wealth over time. Proper and fortunate investing can lead to financial growth and security. It's essential for humans to stay informed and make prudent decisions about the variables that they can control. It is not a bad for humans to seek advice from financial professionals.
Financial Advisors
Financial advisors provide clients with professional advice on how to manage their investments to achieve specific financial goals. The process begins with client consultation to understand the client's financial goals, risk tolerance, time horizon, and other personal factors. This also includes an assessment of the client's current financial situation by analyzing assets, liabilities, income, expenses, and any other relevant factors.Based on the client's needs and resources, the advisor designs a personalized investment strategy recommending a well diversified portfolio allocation among various asset classes like stocks, bonds, and real estate.
Financial advisors can provide money management services, buying and selling investments on behalf of clients. Clients should do market research to avoid paying high fees or falling victim of conflicts of interests and scams. Management includes monitoring and rebalancing the portfolio periodically to ensure it aligns with the desired asset allocation and risk profile. It also includes tracking performance against benchmarks and the client's goals.
Financial advisors can provide holistic financial planning, which might include retirement planning, tax planning, estate planning, and education funding strategies. This can include offering advice on insurance products, including but not limited to life and disability insurance, to protect against financial risks. Financial advice may also include tax efficiency strategies to minimize taxes on investment gains and income. Financial advisors can collaborate with tax professionals such as accountants and lawyers to provide guidance on the tax implications of various investment decisions.
Financial advisors can provide money management services, buying and selling investments on behalf of clients. Clients should do market research to avoid paying high fees or falling victim of conflicts of interests and scams. Management includes monitoring and rebalancing the portfolio periodically to ensure it aligns with the desired asset allocation and risk profile. It also includes tracking performance against benchmarks and the client's goals.
Financial advisors can provide holistic financial planning, which might include retirement planning, tax planning, estate planning, and education funding strategies. This can include offering advice on insurance products, including but not limited to life and disability insurance, to protect against financial risks. Financial advice may also include tax efficiency strategies to minimize taxes on investment gains and income. Financial advisors can collaborate with tax professionals such as accountants and lawyers to provide guidance on the tax implications of various investment decisions.
Financial advisors can also keep clients informed about market trends, potential investment opportunities, and risk mitigation strategies. Financial advisors should stay up to date on global events, market news, and changes in regulations that might impact investments. They should also conduct research on investment options, using both qualitative and quantitative techniques.
Financial advisors should meet with clients regularly to review portfolio performance, discuss any changes in their financial situation, or adjust strategies if needed. They should provide clients with regular statements and reports detailing their investment performance and activities. Advisors can also explain financial topics to ensure that clients can be informed decision-makers.
Financial advisors should adhere to high ethical standards and fiduciary duties to always act in the best interests of their clients free and clear of conflicts of interest. Needless to say, financial advisors must stay compliant with all relevant laws, regulations, and industry standards. They should regularly update their knowledge through continuous learning, attending seminars, and earning or renewing professional certifications.
It's worth noting that the exact services an investment advisor provides can vary widely based on their qualifications, areas of expertise, and the business model of their firm. Additionally, while some investment advisors charge a fee based on the assets they manage (often called "fee-only" advisors), others might earn commissions on the products they sell, and some might utilize a combination of both. It's crucial for clients to understand how their advisors are compensated to ensure transparency and avoid misunderstandings.
Stocks
Stocks or shares represent ownership in a company, or basket of companies, and constitute a claim on part of the company's assets and earnings. When humans buy stocks (also referred to as "shares"), humans become shareholders, meaning they own a piece of the company or basket of companies. The terms "stock" and "share" are often used interchangeably, though technically, "stock" is a generic term referring to ownership of any company, while "share" is supposed to refer to ownership of a specific company. So, someone who owns shares in Apple, owns a stock in the technology sector.
There are two basic or main types of stock: common and preferred. Common shareholders are on the bottom of the priority ladder for ownership structure. If the company goes bankrupt, common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debt holders have been paid in full. Preferred stockholders have a higher claim on assets and earnings than common stockholders. They receive dividends before common stockholders and have priority in the event that a company goes bankrupt and is liquidated. Shareholders exercise control by electing a board of directors and voting on company policy.
There are two basic or main types of stock: common and preferred. Common shareholders are on the bottom of the priority ladder for ownership structure. If the company goes bankrupt, common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debt holders have been paid in full. Preferred stockholders have a higher claim on assets and earnings than common stockholders. They receive dividends before common stockholders and have priority in the event that a company goes bankrupt and is liquidated. Shareholders exercise control by electing a board of directors and voting on company policy.
Some stocks generate dividends depending on whether the company issues dividends or not. Paying dividends is a form of distributing portion of profits to shareholders. Not all companies offer dividends. Some companies choose to reinvest all profits back into the business. Typically, older, more established companies offer regular dividends, while younger, growth-oriented companies may not.
Stocks are usually bought and sold through stock market exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq via stockbroker accounts. Companies list their shares on these exchanges, where investors can buy and sell them.
The value or price of a stock is determined by supply and demand in the market. Factors like the company's performance, general economic conditions, industry trends, company outlook, leadership, market sentiment, etc. influence stock prices.
Not all companies are publicly traded in stock markets. That is, some companies are privately held and are its shares are not sold to the general public. All companies begin as privately held companies, and some decide to go public. To transition from private to public, companies must disclose publicly their financial condition and clear a regulatory process. Once approved by regulators and market houses, companies issue an initial public offering (IPO), selling shares to public investors for the first time. Companies issue (sell) stock to raise funds.
By purchasing shares of a company, the investor is funding the company in consideration for a piece of ownership of the company. The company is offering a business plan that it intends to execute. The investor is betting on the future potential and profitability of that business plan to be executed by the company. If the company performs well, and all other economic and market factors align, the value of the shares might increase. If the company underperforms, or other economic or market factors go bad, the value might decrease. Investing in stocks carries inherent risks. The price of stocks can go down rapidly and unpredictably. However, historically, stocks have provided a higher average return over the long term compared to other investments like bonds, real estate, commodities, and of course, savings accounts.
Bonds
Historically, the bond market has been considered a relatively stable investment compared to stocks, and bonds are often used to diversify portfolios and reduce overall volatility. Returns on bonds and the bond market can vary based on multiple factors, including the type of bonds (government, corporate, municipal, etc.), the bond's duration (short-term vs. long-term), and the prevailing economic conditions, especially interest rates.
Government Bonds: U.S. Treasury bonds, specifically the 10-year Treasury note, are often used as a benchmark for the bond market. Historically, the yield on these bonds has varied, with interest rates peaking in the 1980s (with yields over 15%) and then following a general declining trend.
In recent years, especially post-2008 financial crisis and amid the monetary responses to the COVID-19 pandemic, yields on these bonds have been historically low. For example, in 2020, the 10-year Treasury note yield dropped below 1%, an all-time low.
Corporate Bonds: Corporate bonds generally offer higher yields than government bonds to compensate for the increased credit risk. Investment-grade corporate bonds have seen varying yields but generally followed the same declining trend in interest rates. High-yield (or "junk") bonds offer even higher yields due to their higher risk. The spread between high-yield bonds and government bonds can indicate market perceptions about economic health.
Municipal Bonds: Often used by individual investors for their tax benefits, municipal bond yields have also generally declined with the broader bond market.
International Bonds: Bonds from other countries or regions can offer diversification. Their returns vary widely based on local economic and political conditions. Emerging market bonds, for instance, typically offer higher yields due to higher risks.
The last decades, especially post-2008, have been characterized by historically low interest rates globally. Central banks in major economies have maintained low rates to stimulate economic growth. As a result, bond yields have been relatively low, leading many investors to search for yield in riskier asset classes.
In recent years, especially post-2008 financial crisis and amid the monetary responses to the COVID-19 pandemic, yields on these bonds have been historically low. For example, in 2020, the 10-year Treasury note yield dropped below 1%, an all-time low.
Corporate Bonds: Corporate bonds generally offer higher yields than government bonds to compensate for the increased credit risk. Investment-grade corporate bonds have seen varying yields but generally followed the same declining trend in interest rates. High-yield (or "junk") bonds offer even higher yields due to their higher risk. The spread between high-yield bonds and government bonds can indicate market perceptions about economic health.
Municipal Bonds: Often used by individual investors for their tax benefits, municipal bond yields have also generally declined with the broader bond market.
International Bonds: Bonds from other countries or regions can offer diversification. Their returns vary widely based on local economic and political conditions. Emerging market bonds, for instance, typically offer higher yields due to higher risks.
The last decades, especially post-2008, have been characterized by historically low interest rates globally. Central banks in major economies have maintained low rates to stimulate economic growth. As a result, bond yields have been relatively low, leading many investors to search for yield in riskier asset classes.
Bond prices are inversely related to interest rates. As interest rates fall, existing bond prices rise, and vice versa. Therefore, during periods of declining interest rates, bond investors can realize capital appreciation in addition to the interest payments. Conversely, in a rising rate environment, bond prices can decline. Bonds are particularly sensitive to inflation.
Bond prices are also very sensitive to inflation. If inflation expectations rise, bond yields on new bonds can increase, pushing prices of pre-existing bonds down. In periods when inflation fears become prevalent, bonds, especially long-duration bonds, can underperform.
To get specific annualized returns for bonds and the bond market, refer to indices like the Bloomberg Barclays US Aggregate Bond Index or specific bond ETFs, which track segments of the bond market. Always remember that past performance is not indicative of future results, and it's essential to consider the broader economic context when analyzing historical returns.
To get specific annualized returns for bonds and the bond market, refer to indices like the Bloomberg Barclays US Aggregate Bond Index or specific bond ETFs, which track segments of the bond market. Always remember that past performance is not indicative of future results, and it's essential to consider the broader economic context when analyzing historical returns.
Real Estate
The most common types of real estate investment are residential, commercial, industrial, retail, and mixed use. Residential real estate investing involves purchasing homes, apartments, condos, or townhouses and renting them to tenants. Rental income is generated monthly from the tenants. Commercial real estate focuses on business properties, including office buildings, warehouses, and retail spaces. Tenants usually have longer-term lease agreements than in residential real estate. Industrial real estate covers properties such as warehouses, factories, and distribution centers. These properties can produce rental income and may also offer added value through fees for operations like storage and transportation. Retail real estate involves mostly storefront properties like shopping malls, strip malls, restaurant pads, any other storefront. Investors can earn money through rent from store owners and may also receive a percentage of the retail store's sales revenue in some agreements. Finally, mixed-use real estate may combine elements from the categories mentioned above (e.g., a building with retail spaces on the ground floor, office spaces above, and residential units on the top floors).
Strategies in real estate investing include buying and holding; flipping; wholesaling; and leverage. Buy and hold is a long-term strategy where investors purchase a property and hold onto it for an extended period, benefiting from rental income, certain tax write offs, and appreciation over time. Flipping is where investors buy properties, often in need of renovation and located within hot or growing markets , make the necessary improvements, and then sell them for a profit within a relatively short time frame.
Wholesaling is where investors find underpriced properties and put them under contract (purchase an option to buy them) to then sell the option contract to another buyer at a higher price without ever owning the property themselves. Leverage in real estate allows investors to buy properties with a small down payment and borrow the rest, which amplify returns (and risks) and is the standard way of purchasing real estate.
Stocks vs Real Estate
Historically, the average annual return for the S&P 500, often used as a benchmark for the overall stock market, is around 7-10% after adjusting for inflation. This average includes periods of significant downturns and booms. The U.S. real estate market, taken as a whole, is said to have had average annual returns ranging from 3-5% after adjusting for inflation. Returns can vary significantly depending on the region, market, and type of real estate.
Advantages of real estate investing include the following:
Tangible Asset: Real estate is a physical asset. Many investors appreciate the tangibility compared to stocks, which are intangible.
Rental income. Rental properties can provide a consistent income stream.
Control: Investors have more direct control over their real estate investments compared to stocks. That is, real estate owners can manage their own properties. Companies in the stock market are managed by company executives and boards of directors.
Leverage: Investors can use leverage (borrowed money) to buy property. This can amplify returns, though it also increases risk.
Appreciation: Over time, real estate values tend to rise, leading to capital gains.
Tax Benefits: Real estate investors can benefit from various tax breaks, including depreciation deductions and the potential to defer capital gains taxes through strategies like the 1031 exchange.
Hedge Against Inflation: Real estate often acts as a hedge against inflation since rental rates and property values tend to rise with inflation.
Disadvantages of real estate investing include the following:
Disadvantages of real estate investing include the following:
Capital intensity. Real estate investing requires substantial capital, even when using leverage.
Illiquidity. Selling real property can take a long time and payment of high commission fees.
Management. Managing properties can be expensive, time-consuming, and challenging. Investors often hire property manager, which adds to expenses and cuts on profits.
Overall, real estate investing offers various opportunities to earn income and build wealth, but like all investments, it comes with associated risks. Successful real estate investing often requires research, planning, and ongoing management.
Advantages of Stock Investments:
Liquidity: Stocks are generally more liquid than real estate. You can buy or sell shares on a stock market within seconds, while selling real estate can take weeks or even months.
Lower Transaction Costs: Buying or selling real estate can come with significant transaction costs, including commissions, inspection fees, and closing costs. Stock transactions, especially with the advent of online brokerages offering zero commissions, are typically much cheaper.
Passivity: While real estate can require active management, especially for rental properties, stocks can be a more passive investment.
Diversification: With stocks, it's easier to diversify across many companies and sectors with a relatively small amount of money.
Dividends: Some stocks provide dividend income.
Disadvantages of Stock Investments
Volatility and Risk: Stocks generally have more short-term volatility than real estate. Stock prices can swing dramatically day-to-day based on global events, company news, and economic data.
Lack of control. Generally, investors have little to no control over publicly traded companies. An investor can hold shares of Apple, but will have very little influence or control over Apple's business decisions. Of course, that can be a good thing also.
Lack of control. Generally, investors have little to no control over publicly traded companies. An investor can hold shares of Apple, but will have very little influence or control over Apple's business decisions. Of course, that can be a good thing also.
Less leverage. Typically, stocks are bought with cash in hand rather than with borrowed money. Sophisticated investors can use margin loans using as collateral the value of other stocks, but in general stocks offer less leverage than real estate.
Intangible. Unlike real estate, especially land, that can be counted to exist for long term, companies come and go. Most business fail in the long run. That is why diversification is so important in investing.
The best of both worlds?
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance real estate. By investing in REITs, individuals can own a portion of the real estate (much like owning stock in a company) and potentially earn dividends from the property's income.
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance real estate. By investing in REITs, individuals can own a portion of the real estate (much like owning stock in a company) and potentially earn dividends from the property's income.
Both real estate and stocks have their merits and can serve different purposes in an investment portfolio. Some investors prefer the tangibility and steady cash flow of real estate, while others prefer the liquidity and potential for rapid growth in stocks. A diversified portfolio that includes both can provide a balance of stability and growth potential. Always consult with financial and investment advisors to understand which investment avenue aligns best with your financial goals and risk tolerance.
Stock Market Opportunities in Recent Years
Historically, the stock market has seen various sectors outperform at different times based on economic, technological, geopolitical, and societal trends. Here's a broad overview of some of the sectors that have shown significant outperformance in the last few decades:
Technology (Late 1990s, 2010s-2020s):The late 1990s saw the dot-com boom, during which technology stocks soared. This was followed by the dot-com bust around 2000, after which many tech companies collapsed. The 2010s and beyond have been marked by the dominance of tech giants like Apple, Amazon, Microsoft, Alphabet (Google), and Facebook. The proliferation of smartphones, the rise of cloud computing, and the expansion of e-commerce have been key drivers.
Financials (Early to Mid-2000s): Before the global financial crisis of 2007-2008, banks and financial institutions saw substantial growth, driven by rising real estate prices and increased financial engineering.
Energy (Mid to Late 2000s): The oil price surge in the mid to late 2000s led to significant returns for energy companies.
Health Care (2010s): Biotech companies and pharmaceuticals, in particular, have had periods of outperformance. The aging global population and the advancement in medical technologies and treatments have been growth drivers.
Consumer Discretionary (2010s): Companies like Amazon, Netflix, and Tesla (which later shifted to being classified under Consumer Discretionary from Technology in some indices) have driven significant returns.
Real Estate (Early 2000s):Leading up to the housing bubble, real estate and associated sectors (like construction) saw substantial growth.
Communication Services (Late 2010s-2020s):This is a relatively new sector classification that includes companies previously considered tech or consumer discretionary stocks, such as Facebook, Alphabet, and Netflix. These companies have been significant contributors to market returns.
While some sectors have outperformed in specific periods, they've also had periods of underperformance. For instance, the energy sector, which boomed in the mid-2000s, faced challenges in the 2010s due to fluctuating oil prices and a shift towards renewable energy sources. It later recovered nicely. In addition, unexpected crises such as the COVID-19 pandemic can suddenly and dramatically affect sector performance. During the pandemic, sectors like technology and healthcare saw rapid growth, while traditional energy, travel, and some consumer discretionary sectors faced substantial declines. After the pandemic, everything shifted the other way around.
Real Estate Opportunities in Recent Years
Real estate investment has long been a popular way to accumulate wealth, but the best opportunities often vary based on economic, demographic, technological, and geopolitical factors. Here are some of the notable real estate investment trends and opportunities from recent history:
Urban Revitalization: In many cities worldwide, particularly in the U.S., old industrial areas or neglected urban districts have been revitalized into trendy residential and commercial zones. Examples include the Meatpacking District in New York City and the Pearl District in Portland, Oregon.
Tech Hubs: Areas with a significant presence of tech companies, startups, and innovation hubs have seen property values skyrocket. Silicon Valley in California, the Research Triangle in North Carolina, and cities like Seattle, Austin, and Boston have witnessed this trend.
Short-term Rentals: The rise of platforms like Airbnb has made investing in properties specifically for short-term rentals a lucrative venture in tourist hotspots.
Warehouse and Industrial Spaces: With the boom in e-commerce, there's been a growing demand for warehouse spaces, especially near urban centers, for companies like Amazon.
Suburban Expansion: As cities become more populated and housing prices rise, suburbs or peripheral areas see growth. This has been intensified by the COVID-19 pandemic, where a shift to remote work led many to seek larger homes away from city centers.
Emerging Markets: Countries with rapidly growing economies and urbanizing populations present opportunities for real estate investment. Countries like India, Vietnam, and parts of Africa have been highlighted in recent years.
Green and Sustainable Buildings: With a growing emphasis on sustainability, properties that are energy-efficient, use sustainable materials, or have other green features can fetch premium prices.
Co-living and Co-working Spaces: As urban areas become densely populated and property prices rise, there's a growing trend towards co-living spaces, especially among younger demographics. Similarly, the rise of freelancers and startups has boosted the demand for co-working spaces.
Senior Living Facilities: With aging populations in many western countries, there's a growing need for retirement communities and assisted living facilities.
International Beachfront Properties: Especially in countries where prices are low compared to the global average, beachfront properties are sought after both for personal use and as rentals.
Student Housing: In cities with major universities, especially where student populations are growing faster than housing availability, investing in student housing proved lucrative in recent years.
Transit-Oriented Development: In urban areas, properties near major transit hubs or new transit lines often appreciate faster than those in less accessible locations.
It's essential to note that while these trends represent some of the best opportunities in recent history, the success of any real estate investment is influenced by various factors, including location, timing, economic conditions, and individual circumstances. Always conduct thorough research and consider seeking advice from real estate professionals before making an investment decision.
Urban Revitalization: In many cities worldwide, particularly in the U.S., old industrial areas or neglected urban districts have been revitalized into trendy residential and commercial zones. Examples include the Meatpacking District in New York City and the Pearl District in Portland, Oregon.
Tech Hubs: Areas with a significant presence of tech companies, startups, and innovation hubs have seen property values skyrocket. Silicon Valley in California, the Research Triangle in North Carolina, and cities like Seattle, Austin, and Boston have witnessed this trend.
Short-term Rentals: The rise of platforms like Airbnb has made investing in properties specifically for short-term rentals a lucrative venture in tourist hotspots.
Warehouse and Industrial Spaces: With the boom in e-commerce, there's been a growing demand for warehouse spaces, especially near urban centers, for companies like Amazon.
Suburban Expansion: As cities become more populated and housing prices rise, suburbs or peripheral areas see growth. This has been intensified by the COVID-19 pandemic, where a shift to remote work led many to seek larger homes away from city centers.
Emerging Markets: Countries with rapidly growing economies and urbanizing populations present opportunities for real estate investment. Countries like India, Vietnam, and parts of Africa have been highlighted in recent years.
Green and Sustainable Buildings: With a growing emphasis on sustainability, properties that are energy-efficient, use sustainable materials, or have other green features can fetch premium prices.
Co-living and Co-working Spaces: As urban areas become densely populated and property prices rise, there's a growing trend towards co-living spaces, especially among younger demographics. Similarly, the rise of freelancers and startups has boosted the demand for co-working spaces.
Senior Living Facilities: With aging populations in many western countries, there's a growing need for retirement communities and assisted living facilities.
International Beachfront Properties: Especially in countries where prices are low compared to the global average, beachfront properties are sought after both for personal use and as rentals.
Student Housing: In cities with major universities, especially where student populations are growing faster than housing availability, investing in student housing proved lucrative in recent years.
Transit-Oriented Development: In urban areas, properties near major transit hubs or new transit lines often appreciate faster than those in less accessible locations.
It's essential to note that while these trends represent some of the best opportunities in recent history, the success of any real estate investment is influenced by various factors, including location, timing, economic conditions, and individual circumstances. Always conduct thorough research and consider seeking advice from real estate professionals before making an investment decision.
Historically, the stock market has seen various sectors outperform at different times based on economic, technological, geopolitical, and societal trends. Here's a broad overview of some of the sectors that have shown significant outperformance in the last few decades:
Technology (Late 1990s, 2010s-2020s):The late 1990s saw the dot-com boom, during which technology stocks soared. This was followed by the dot-com bust around 2000, after which many tech companies collapsed. The 2010s and beyond have been marked by the dominance of tech giants like Apple, Amazon, Microsoft, Alphabet (Google), and Facebook. The proliferation of smartphones, the rise of cloud computing, and the expansion of e-commerce have been key drivers.
Financials (Early to Mid-2000s): Before the global financial crisis of 2007-2008, banks and financial institutions saw substantial growth, driven by rising real estate prices and increased financial engineering.
Energy (Mid to Late 2000s): The oil price surge in the mid to late 2000s led to significant returns for energy companies.
Health Care (2010s): Biotech companies and pharmaceuticals, in particular, have had periods of outperformance. The aging global population and the advancement in medical technologies and treatments have been growth drivers.
Consumer Discretionary (2010s): Companies like Amazon, Netflix, and Tesla (which later shifted to being classified under Consumer Discretionary from Technology in some indices) have driven significant returns.
Real Estate (Early 2000s):Leading up to the housing bubble, real estate and associated sectors (like construction) saw substantial growth.
Communication Services (Late 2010s-2020s):This is a relatively new sector classification that includes companies previously considered tech or consumer discretionary stocks, such as Facebook, Alphabet, and Netflix. These companies have been significant contributors to market returns.
While some sectors have outperformed in specific periods, they've also had periods of underperformance. For instance, the energy sector, which boomed in the mid-2000s, faced challenges in the 2010s due to fluctuating oil prices and a shift towards renewable energy sources. It later recovered nicely. In addition, unexpected crises such as the COVID-19 pandemic can suddenly and dramatically affect sector performance. During the pandemic, sectors like technology and healthcare saw rapid growth, while traditional energy, travel, and some consumer discretionary sectors faced substantial declines. After the pandemic, everything shifted the other way around.
About two years after the beginning of the COVID19 pandemic, the S&P 500 reached an all time high of 4,796 in January 2022. However, in about nine months, by September 2022, it had lost about 25% of that record valuation. The S&P 500 has recovered about half territory, having closed at 4,288 on Friday, September 29, 2023.
To reclaim record high territory, the S&P 500 needs an increase of almost 12%. That will happen someday. It is unlikely, however, that it happens this year or prior to January 2024. That would mean over two years of zero gains and relative losses.
While losing money can happen overnight in the stock market, creating wealth usually takes a very long time due to the constant ups and downs. Diversification across sectors, and having a long-term investment horizon are the best strategies for most investors to mitigate the risks associated with the cyclical performance of individual sectors and the overall stock market.
AI Financial Advisors
Investing can be very simple and very complicated at the same time. Passive investing can be as simple as buying into a well-diversified index funds ETF biweekly or monthly. Aggressive investing, which is picking stocks, or buying real estate to actively manage it, can prive very complicated. Regardless the methodology, AI will surely become the best financial advisor available to human investors.
AI can help humans assess their financial situation and goals. AI can recommend the investment strategies most likely to help the investor improve its financial situation and meet the desired goals. AI cannot control the global economy nor predict the future of the market with 100% accuracy. However, AI can study all recorded financial history to make educated guesses based on simulations. AI can do all this significantly faster and with more precision than any human advisor.
AI will not displace all financial advisors right away. It will take two or three decades for AI to work the marktest independently of human babysitters and trainers. AI, however, will revolutionize the financial advice industry. For sure, AI has been used in the financial sectors for years now. As the technology keeps improving so will the financial advice applications.
Humans will not miss human financial advisors. Humans, like all other animals, are programmed to seek pleasure and avoid pain. Knowing that AI can provide superior analytical work product, humans will seek and prefer AI over more fallible humans. After all, the goal of financial investing is protecting and growing wealth. Humans will hire whoever can help them achieve that goal whether human or AI.
In the next two or three decades, the financial advice industry will continually become more hybrid between human advisors and AI analysts. How financial analysts will be almost completely replace by AI is subject of another article.
Stay tuned to Creatix for more thought-provoking AI Q&As. If the articles keep you thinking, they are working.
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