Tags: Average | market | risk | jobs

'Average Is Over' Defines New Investment Environment

By    |   Wednesday, 30 Oct 2013 07:42 AM

George Mason University economist Tyler Cowen recently wrote a book called "Average is Over," which details how technology is contributing to a growing economic divide.

He points out that low-skill jobs (like janitors) will be needed as technology improves, and upper-income jobs will always be available for the highly skilled individual. Average careers, such as middle management or bank tellers, are less viable, and that will drive changes in society.

The end of average might also be a summary of the current investment environment. Average returns seem like a thing of the past. Simple strategies like equity index funds and bond funds no longer meet the needs of most investors.

Stocks have done well this year and have actually provided double-digit gains in four of the past five years, including 2013 so far. In 2011, the year without double-digit gains, the Standard & Poor's 500 was unchanged. While the past five years have been strong, investors are often haunted by the memory of 2008.

On the fixed-income side, interest rates are low and have been for several years. They are also likely to stay low for several years, as the economy continues to reduce the availability of average careers.

In the future, investors should not expect average. Risk in equity markets is perceived to be above average and returns from fixed-income investments are below average. To survive in this environment, investors must adapt.

Index funds expose investors to 100 percent of the risk of the market and investors should consider active strategies to decrease risk. They must also increase risk exposure in fixed-income investments to obtain income in a low-rate world.

Average is over for the economy, for equity investors and for fixed-income investors. New investment strategies are needed and risk needs to be redefined.

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MichaelCarr
George Mason University economist Tyler Cowen recently wrote a book called "Average is Over," which details how technology is contributing to a growing economic divide.
Average,market,risk,jobs
295
2013-42-30
Wednesday, 30 Oct 2013 07:42 AM
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