It’s the end of the world as we know it

This has been a year of turmoil, upsets, shocks and frustrations, and the public discourse reflects that. The Armageddon narrative is everywhere, from Wall Street to Main Street and everywhere in between. Wildfires, diseases, recessions, elections — I recently heard a newscaster ask: “Is there going to even be a 2021?” The fact that this kind of dark humor seems commonplace points to a deeper mental shift that I think needs attention: The pandemic has made short-term thinkers out of us, and we need to adjust our perspective.

Short-term thinking has been linked to myriad financial problems. People who are short-term thinkers have higher debt burdens, lower savings rates, steeper discount curves and more impulsive behaviors overall. We’ve long known that long-term thinking is the bedrock of long-term planning, but with so many norms being broken, so many changes to our daily lives and so much still unknown about the near term, how is a person supposed to see the horizon in the distance? How can we keep our eyes on the long term when we can’t see past next week?

The answer is time travel.  Mental time travel, that is. We need to use the power of imagination to step back and look at the big picture from a bird’s-eye view. We have to remember the fundamental truth of long-term investing: Markets are always volatile and unpredictable in the short run, but the long run has some predictable elements. It is those few fundamental trends that can help us shape a long-term plan.

Essentially, we need to mentally fast-forward past the present turmoil to see what long-term trends may emerge as a result of the crises we face today. When we do this, we can see that, while the near term is anyone’s guess, the long term has some predictable elements, and with the right perspective, we can turn that to our advantage.

CRISIS CREATES OPPORTUNITY

“Good fortune has its roots in disaster, and disaster lurks with good fortune.”

Tao Te Ching, v. 58

The world as we know it really is ending, but frankly, that’s always been true. Each generation of technology makes the one before it obsolete. Every advancement leaves some things behind.  Every challenge we face today represents a major opportunity for markets to solve it. Climate change is an enormous opportunity for technology to change the way we produce and consume energy. Pandemics represent opportunities for biotechnology to produce new vaccines and treatments. Changes in property risk from wildfires, floods and hurricanes represent an opportunity for innovation in the insurance sector. Every challenge is an opportunity if viewed through a long-term lens. We just have to learn to see past the immediate confusion.

For example, we don’t know exactly how it will take shape, but we do know with some degree of certainty that the economy of 2050 will be lower carbon, higher tech, and more interconnected than today. With that in mind, what opportunities might long-term investors want to be looking for when building a portfolio for retirement in that future? Diversification is our friend here, as always, because we don’t know which types of energy tech will be the big winners, for example. Still, you don’t need to roll the dice on the next big thing. You only need to find a few diversified funds that comprise the sectors that will benefit from these structural changes.

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With our eyes on the big picture, we see opportunity where a present focus sees only chaos. If we can skip mentally past this time of major structural transition, we can see that there is huge opportunity right now for people with long-term vision. What is real today was science fiction 30 years ago. Mental time travel can help us select funds and opportunities that will pay off in the futuristic economy of 30 years from now.

Don’t let short-term thinking blind you to long-term opportunities. Take a few minutes now to imagine that you have travelled through time to the year 2050. What’s different? What’s the same? What companies are positioned now to thrive in that economy? Where there is challenge today, there is a solution tomorrow. Who is finding those solutions? Which companies are thinking 100 years ahead? Mental time travel like this can help us replace the doom and Armageddon trope with one of opportunity, positive transformation and hope.

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Sarah Newcomb is a behavioral economist at Morningstar Inc.

Related Topics: Behavioral Finance, Client Servicing