Buckle up, buttercup: Why the new era of investing demands smarter risk – Allison Schrager

Key topicsAI and tech disruption may bring gains - and greater volatilityGlobal market fragmentation challenges old diversification strategiesHigher inflation and debt call for smarter, longer-term bond strategiesSign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.The auditorium doors will open for BNIC#2 on 10 September 2025 in Hermanus. For more information and tickets, click here..By Allison Schrager.They have been called “the four most costly words in the annals of investing,” and surely that’s true: This time is different. Still — hear me out! — there are reasons to entertain the possibility that, well, this time really is different. The nature of risk is changing, and markets are changing along with it.The investing era of the past decade and a half, when just about everyone made money, has passed. That could bring more upside for investors — but also more risk. Investing will require more attention and skill, and risk management will matter again.Three big changes underlie the shift. The first is a technological shock. Despite a bleak outlook, partly due to soaring government debt and policy (especially on tariffs and immigration) that tends to put politics ahead of economic concerns, the US economy still has some important things going for it. Chief among them is that it is still the home of much of the world’s innovation, especially in artificial intelligence.No one knows what AI and other technologies will mean for the economy, or how and when change will occur. If AI plays out the way other big innovations did, it will increase productivity and profitability. Stock prices will go up for companies that can make the most of the opportunity. This expectation is one reason the markets have kept rising even though stocks are a little expensive right now.Longer term, there will be fits and starts. Technological transformation of the economy is a messy and uncertain process that creates many winners and losers. It can take decades to play out. AI will of course change the economy, but in ways we can’t yet fathom.In fact, between AI and the economic headwinds added by government policy, there will almost certainly be many false starts and bad bets, as well as some stock market crashes and hype about era-defining companies that will be forgotten in 10 years. This means that the market will be more volatile, even as it offers higher expected returns.The second change is the increased financial fragmentation brought about by the new global trading order. Even before President Donald Trump’s trade war, markets were fragmenting. In the aftermath of the pandemic, there was a shift to more “friendshoring” (that is, trading with like-minded countries or ones where the relationship is stable). The result is markets will be less integrated and less correlated.In the last 20 years, investors got away with some home bias because US stocks outperformed, and markets were relatively correlated because they were so integrated. That will no longer be true if countries trade less and cross-border capital flows decrease. Since diversification won’t be built in anymore, investors will need to seek it out..The third big change is a higher debt and inflation environment. This will bring not only higher interest rates, but also a steeper yield curve and more volatile rates. That means less stable correlations with the stock market and will require a more sophisticated fixed-income strategy. Investors will no longer be able to count on a negative correlation between stocks and bonds.For the last 20 years or so, it was possible to do well in markets without taking risk management all that seriously. You could buy the S&P 500 and some government bonds, and do pretty well. That won’t cut it anymore — unless you are willing to tolerate lots of volatility, or even years of low returns.Asset managers, sensing this changing world, are arguing that it requires more active management. But stock-picking will also be much harder and less predictable. The focus should not be on trying to outsmart the market, but on managing risk. It may be a new era, but the tried-and-true strategy many investors have forgotten is their best hope.That means two things. First, to make up for the fragmentation, US investors need to diversify internationally and avoid home bias. Second, they need to hedge the remaining risk by adopting a more sophisticated fixed-income strategy. Many people are going shorter on the curve because it is less volatile, but in a higher-inflation environment with less stable correlations, this approach could lose them money. Instead, investors need to be thoughtful about which duration of bonds to buy and have a plan for inflation.In other words, to use a phrase with a slightly more neutral connotation for investors: Buckle up, buttercup..© 2025 Bloomberg L.P.

Buckle up, buttercup: Why the new era of investing demands smarter risk – Allison Schrager

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