💵 Pay Attention - The Future Of Finance Is Here

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I have been invited on to CNBC Arabia today (4PM BST) to discuss the future of the 60/40 portfolio - the stalwart of long-term investing in America and many other parts of the world.

As I thought about what I would say it struck me that the future of this style of portfolio construction, and indeed investing and trading as a whole, will be determined by two separate drivers, which we could broadly label as economic and societal.

The economic driver effects are likely to be short-term. If only because there is little visibility about the markets or the economy beyond a couple of years out.

Yes, bond markets price 30 years and more ahead. But in truth those prices are best guesses based on extrapolations of current markets prices and trends.

Of course, very few people, if any, will be reviewing the accuracy of thirty-year T-bond prices today versus interest rates in thirty years' time... although perhaps they should.

At best, the adjustments to the asset allocation of the 60:40 portfolio, which is currently, and classically set at 60% invested in stocks and 40% in bonds, are likely to be tactical (short to medium-term) rather than strategic (long-term) in nature.

We will circle back to the economic drivers and the tactical changes that they may bring about a bit later but for now, let’s turn our gaze onto the societal drivers of change.

Let's kick off with an infographic. Who doesn't love one of those? So much better than a paragraph of text which you might have to read and digest. Nobody's got time for that...

Now let’s look at the breakdown of the population in the US by generational cohort...

Can you tell where this is going yet?

Attention spans are declining and the percentage of younger people in the US population is growing. Younger people, who, work and live in a dynamic environment where (for better or worse), products and services are largely available on demand 24/7.

Millennial and GenZ investors are becoming used to trading Crypto and defi instruments 24/7, and to seeing instant results as social media influencers and others (yes you Elon) pump and dump coins and staking protocols.

They have seen the power (if not the folly) of networked investing play out in the fortunes of meme stocks. If they want results they want them now, not in 20 years.

The average holding period for stocks is now less than 12 months.

In fact, according to data from Refinitiv and the NYSE, it’s slipped to just 5.5 months. That’s down from an average of 8.0 years in the late 1950s.

At the same time, the average lifespan of an S&P 500 stock has been contracting (regular readers knew I would come back to this).

In 1970 the typical S&P stock had a shelf life of some 35 years. By 2018 that had fallen to 20 years. That figure is predicted to fall to 15 years or less by 2030.

And who’s to say that we won't see even bigger changes than that in the years ahead?

After all how many of us had heard of Open AI this time last year?

However, in a few short months, its principal product ChatGPT has become one of the most talked about items of modern times, accruing hundreds of millions of users and subscribers.

Enabling the development of thousands of tolls and spin-offs that leverage Chat GPT’s generative AI capabilities.

Microsoft has invested up to $10.0 billion into a partnership with Open AI, which itself has raised $300 million from VCs including Tiger Global, Sequoia Capital, Andreessen Horowitz, Thrive, K2 Global and Founders Fund.

According to industry media, that values the company at between $27.0 and $29.0 billion: a valuation that's larger than the market caps of more than 200 current S&P stocks.

While we may debate the merits of increasing an allocation to stocks or bonds in the 60-40 portfolios, based on views such as the future path of interest rates, inflation, the likelihood of a recession, deglobalisation and the move to a greener global economy...

The truth is that the ground is shifting under our feet.

David has already demonstrated the versatility of generative AI creating humorous videos and using Agent GPT to create a simple signal based on third-party sentiment data.

We have seen the rise in the popularity of ODTE or zero-day options trading.

How long can it be before traders turn the focus of generative AI to this and other markets?

The current generation of bots may (do) lack the requisite knowledge/references and tools to allow them to analyse and predict the movements of options and other securities markets.

But surely it's just a matter of time before one is trained on a large language or finance model, perhaps by scraping a repository of quantitative research and a couple of decades of price data to boot.

To summarise, the debate about the future of 60/40 funds may be academic. Within 5 years we may see the emergence of a new form of actively managed AI-driven dynamic asset allocation tool.

One that crawls the markets, constantly looking for the best investment opportunities, some of which may only last for a few moments. Similar (specialised) algorithms already exist so it's not too much of a leap.  

Regulators might not be too happy about it but that hasn't stopped the growth and adoption of crypto.

The truth is that now that AI is out in the wild it will be almost impossible to fence it in.

If large money managers don't adapt their services and products to serve the new generation of traders and tools it’s quite conceivable that a new defi infrastructure could spring up and eat their lunch.

Our mantra of Adapt or Die has never been truer

Now has anyone seen my Blackberry.....