Here's an investor's intro to AI, 5G, tech stocks, the green industry, private equity and hedge funds.
The current economic situation—a worldwide pandemic, millions of job losses, a steep economic downturn and uncertainty about the future—is not the time to panic and change your long-term investment strategy, according to the experts.
And yet, “in the 25 years I’ve been doing this, this is the hardest time to answer that (where to invest) question,” says Joel Guth, CEO of Columbus-based Gryphon Financial Partners. Nevertheless, he calls for patience and for investors to focus on two things: The goals and timeline of your investments, and “your risk tolerance and how much downside risk you can stomach.”
Staying calm and sticking to the long-term plan is a sentiment other financial advisers echo.
“Nobody has a crystal ball, but we’re cautiously optimistic,” says Jamie Reed, managing director for JPMorgan Private Bank and market manager for Ohio. He sees more of a more of a U-shaped recovery than a V-shaped recovery, beginning slowly, possibly in the third quarter. “If you look at the data, things are bad, but we’re starting to see some improvement, some green shoots, and the jobless claims are starting to come down.”Stay up to date with the region’s business scene. Subscribe to Columbus CEO’s weekly newsletter.
The new normal has created some long-term changes in society and the workplace, which in turn have created investment options. A diversified investment portfolio and an understanding of emerging business sectors, such as tech-based companies and direct-to-consumer companies that cater to the growing number of stay-at-home and work-from-home individuals, are some of the keys to the financial future. Combined with enough liquidity to get you through some short-term pain.
“The answer to the question of what should I do in these times is to be clear on your investment objectives and have a sound investment process that you understand and continue to follow,” says Matt Hamilton, CEO of Hamilton Capital Management.
5G and AI are the keys
“During and post pandemic, the trend we are talking about is the digital transformation,” Reed says, adding the 5G cellular network revolution and rapid growth of artificial intelligence will help determine winners and losers and dictate investment decisions.
The list of business sectors 5G and AI will impact is vast and includes data-driven health care and robotic surgery, companies that produce the semiconductors that will run 5G and how we will, or maybe even won’t, drive in the future. “5G will impact everything from how cars travel down the road and communicate with one another to how we consume content in our leisure time,” Reed says.
Green is good
Reed also believes there’s a bright future for sustainable businesses, which are companies that have a minimal or even a positive environmental impact. “This cuts across all industries and is about how products are produced, how services delivered and how resources are used,” he says. “People are becoming more socially conscious and when you have a movement in a certain direction, there’s an opportunity for new companies to emerge.”
Guth believes volatility will be the norm for the next 12 to 18 months, “but over a five-year window I have incredible faith in the U.S. economy and the innovation that will occur coming out of this.”
A diverse portfolio is a hedge against volatility, and investing in a private equity fund (ownership of privately held companies) is an option for more patient investors who won’t need access to these funds for at least two years. There is risk with private equity funds, but “I tell investors who can weather the current storm, especially wealthy families, that private equity is investing in smaller businesses that will be tomorrow’s larger businesses.”
Tough times can create the innovations that eventually become profitable companies.
But there’s a cost to private equity—Reed says the minimum investment is about $250,000. And then there the question of: Which private equity fund is best for me? “They’re very complex and require a lot of due diligence,” Reed says.
While some individual investors have the time and expertise to do their homework and decide, for many investors, a large and well-established investment firm is the way to go.
There is another private equity option, too. “There are pool vehicles for smaller investments into some private equity investments, if you can find the right adviser,” Reed says.
Hedge funds are pools of money invested in securities and other types of investments. They are “limited to wealthier investors who can afford the higher fees and [higher] risks of hedge fund investing, and institutional investors, including pension funds,” according to the U.S. Securities and Exchange Commission.
“Hedge funds have underperformed public markets, particularly over the past 10 years,” says Jeffrey Wilkins, a managing director at Hamilton Capital. “They can be a tricky vehicle, but hedge funds can be a very good opportunity to access certain asset classes [and] access certain kinds of credit versus ETFs [exchange-traded funds] and mutual funds because of how the underlying credit investments actually trade.”
Another reason to consider a hedge fund “is to access a team with expertise which will only own a select group of what we consider attractive assets within a larger asset class,” says Lee Caleshu, a Hamilton Capital managing director, adding another benefit of hedge funds in volatile times is they “protect our clients against mass redemption during market stress. Hedge funds prevent other investors from redeeming at inopportune times and hurting all the investors in the fund.”
Like private equity funds, it takes a lot of capital to get into the hedge fund market. “It differs, but I would say we’re talking millions of dollars to get into a hedge fund that we would consider institutional quality,” Caleshu says.
The top funds “want fewer investors writing larger checks,” Wilkins adds.
Work at home stocks
The Covid-19 pandemic has created a new investment strategy and catch phrase: Work at home stocks, says Christian Tharp, a Columbus-based financial coach with the Adam Mesh Trading Group. “Who heard of Zoom six months ago, and they just hit a new high on earnings,” he says of the online conferencing tech company.
Other e-commerce companies benefitting from more people staying and working from home are Wayfair (furniture and home goods) and Shopify (software services for websites and online businesses). “More and more people are working from home and the markets seem to believe that won’t change even as the economy opens up,” Tharp says.
Steve Wartenberg is a freelance writer.