It’s difficult to know where to invest your money right now. Most asset classes are moving in the wrong direction as the world teeters on the edge of a double dip recession.
There is growing distrust of most of the established financial markets – complaints include that they are deliberately complicated and full of jargon, they are over regulated, there are huge rewards for a very few that are not necessarily linked to sustained performance and, perhaps most importantly, when things go wrong it seems to be the ordinary people who are the ones that really suffer.
Let’s look at two of the most common asset classes for personal investment – stocks and bonds. The FTSE is the most widely used index of stocks in the UK. In October 2001 the FTSE stood at 5036 and today it is 4944 – actually down over the ten year period. Once you factor in inflation it is clear that the FTSE today is worth materially less than the FTSE of 2001.
UK government bonds have traditionally been a solid way of ensuring a reasonable return with good downside protection. Currently a 10 Year UK Government bond is yielding a miserly 2.4% – and again this doesn’t even keep up with inflation.
With all of this in mind it occurred to me that our entrepreneurs, with their hopes and dreams of offering customers something different and something better, represent a much safer place to put our hard earned money.
Of course, investing in start-ups is a high-risk exercise and also locks up your money for a good few years. But at the same time you are investing in the companies of the future rather than the ones of the past. In addition, these companies will be reaching maturity and perhaps looking towards an exit a few years down the road when there is a very good chance that the economy will be in better health.
All of this of course depends on the basic fundamentals of choosing companies and markets that are growing fast and will be able to prosper through the economic downturn. In the technology market I think there are three megatrends right now that would all qualify in this way – namely social, cloud computing and mobile.
In terms of Europe, I’ve made various points before about why investing in early stage companies in this region represents a great opportunity. You can see a previous post on the subject here but, in essence, my argument is that there is now an under supply of funds available to invest in European companies which presents great opportunities for investors to strike good deals at the right price, especially as compared to the inflated US market.
All of this of course depends on the basic fundamentals of choosing companies and markets that are growing fast and will be able to prosper through the economic downturn. I invest in the technology market and I think there are three megatrends right now that would all qualify in this way – namely social, cloud computing and mobile.
Social networking is transforming the way we use the web, which used to be about search but is now increasingly about who we are connected to; mobile is predicted this year to overtake the PC as the primary way we access the internet; and the cloud has been described by Steve Jobs as the new ‘digital hub’ as more and more computing resources are moved across to centralized data centers. These trends are huge and bring about tremendous disruption and opportunities – both signs that this is a great time to invest. I’m sure there are similar major changes going on in other industries as well.
By investing in early stage companies in fast-growth industries there is also an altruistic thread (although making money has to come first) in that we will be helping the wider economy, creating jobs and helping to restore much needed confidence and growth. Instead of complaining about how industries are shrinking, or being lost to other countries or regions, shouldn’t we be investing in new industries that can replace them and where we can still compete and deliver a great product or service?
So it begs the question – are traditional areas of stocks, bonds and property still the best place to have your money? Will they, over a ten year period, at least ensure that you have more money than you started with, after adjusting for inflation? Or has the world changed?
I think the world has changed and you will be much better off investing in the people and the companies who are changing it rather than in outdated markets that have let us down.