Spring 2017 1

A Good Time for Long-Term Investors

by A. Scott White, CFP®, ChFC, CLU
President, Scott White Advisors

In my opinion, the future for long-term investors has never been more promising than it is today.

That belief may cause some people to ask, “How can you make such a statement with so many uncertainties in our world today?” Those uncertainties include a new administration in the U.S., causing many to wonder what changes lie ahead with trade, taxes and spending. The United Kingdom’s withdrawal from the European Union, commonly referred to as Brexit, is an uncertainty. There are also the upcoming elections later this year in France, Germany and Italy since Italy’s President, Matteo Renzi, resigned last year. And then there are the usual uncertainties about the U.S. Federal Reserve possibly raising interest rates, the prospect of increasing inflation, and the unknown GDP. Don’t markets need certainty to proceed to higher levels? How can it be such a good time for the long-term investor if no one knows what to expect?

To begin to explain why I think it is a good time for the long-term investor, it is necessary to point out the obvious differences between a speculator and a long-term investor. Although the financial press interchanges these terms as if they were synonymous, they are not. To me, a speculator is placing bets on whether the price of an investment will move up or down depending on the outcome of events that may or may not happen. On the other hand, the long-term investor is looking to invest in investments that appear undervalued compared to intrinsic value, anticipating that over time the price of the security will move to its intrinsic value creating investment gains. For equity markets, this means investing in the world’s most profitable companies, with great balance sheets, whose management works on behalf of its shareholders, and not paying too much for the stock when purchasing it.

As for investors, there are two kinds: short-term investors and long-term investors. For short-term investors, most of one’s focus should be on principal protection—and that comes at the price of forfeiting long-term growth. A short-term focus usually assures that any decision on how to invest concludes by building a portfolio made up of fixed income products. While the focus of long term investors is on growing the value of one’s assets over time to minimize the negative effects of inflation.

It may surprise you to realize that a couple retiring today should think of themselves as long-term investors. Anyone entering retirement today at age 65 has a 50% chance that one spouse will live 30 years.1 And if the couple’s income does not go up, then they are losing purchasing power over time, due to the effects of inflation. For example, a postage stamp in 1987 cost 22 cents, and it is 46 cents today; therefore, the retired couple needs money to double their income during retirement to purchase the same amount.

For those who are investors, monitoring their investments and holding them for the long term to meet their goals, I think the future for profitable global companies has never been better. I say this in spite of the uncertainties mentioned above, because it really comes down to one thing: how many customers these companies sell their goods and services to worldwide.

Let’s acknowledge the premise that the world’s poor populations, for the most part, are not customers of the world’s most profitable global corporations. After all, anyone earning less than $1.90 a day is probably not in the market to buy much of anything. World Bank projections suggest that global poverty may have reached 700 million, or 9.6 percent of the global population, in 2015.2 But if we focus on the world’s middle class, which can purchase profitable companies’ goods and services, we see dramatic changes taking place in world demographics.

Advances in cell phone technology and the advent of the internet are fueling an educational revolution that is paving the way for poor people to advance to the middle class. To put today’s speed of growth of the global middle class into perspective, consider its trajectory. In 1820, after the Napoleonic War in Europe, there were probably no more than 2.5 million people, out of a worldwide population of 1 billion, who were in the middle class. By the beginning of the 20th century, the global middle class was around 90 million strong. By 1975, 150 years after starting its growth phase, the middle class had reached 1 billion people. By 2006, another 1 billion had joined the middle class, and now less than a decade later, there are 3 billion people, worldwide, in the middle class. This group could surpass 4 billion by 2021, making it a majority of the world’s population.3

While there may be a decline in the middle class in the U.S.4, the number of people worldwide entering the middle class more than offsets the decline here. Some economists believe that most of the losses in the U.S. middle class are a result of those people moving into the upper income class5, and not declining into the lower income class. So based on population growth, we can see that there is an opportunity for the world’s most profitable companies to sell even more goods and services. And as more and more of the world’s population have more access to education, we don’t expect the demographic changes that are under way to slow any time soon.

1 Genworth 2012 Cost of Care Survey: Home Care Providers, Adult Day Health Care Facilities, Assisted Living Facilities and Nursing Homes.
2 World Bank Group 2016. Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change. Overview booklet World Bank.
3Kraras, Homi, “How a Growing Global Middle Classs Could Save the World’s Economy” Trend Summer 2016, July 05, 2016.
4Pew Research Center, “America’s Shrinking Middle Class: A Close Look at Changes With Metropolitan Area. May 11, 2016.
5Steven Horwitz, Foundation for Economic Education, “Why is the Middle Class Shrinking?, December 30, 2015.

The information contained in this report does not purport to be a complete description of the securities markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate and complete. Any opinions are those of Scott White Advisors and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date subject to change without notice. Past performance may not be indicative of future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Strategies discussed may not be suitable for all investors. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss.

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