How to Invest for the Next 10 Years

This year, investors have endured a near-daily onslaught of market-moving news sketching a picture of slowing economic growth, elevated inflation, and flagging fiscal and monetary stimulus.

In response, the S&P 500 has tumbled more than 22% from its record high and bonds have lost about 14% since January. Amid the torrent of reports—everything from monthly inflation and jobs numbers to seemingly every utterance of Federal Reserve officials—it’s easy for investors to get caught up in the here and now.

Yet investing success is most dependably achieved with a long-term perspective. That’s why this Guide to Wealth is all about taking a long view. In this and related stories, we identify strategies and trends—as well as stock, bond, and fund picks—that we expect to work for the next 10 years.

With stock and bond indexes projected to have low-single-digit returns for the next market cycle, a long-term portfolio should look very different going forward than it did in the past 10 years. We suggest engaging in active stock-picking, or buying funds that do so, rather than deploying passive indexes; adding alternatives; and, yes, adding to fixed income.

In fact, the 60/40 stock/bond split looks appealing again, after the portfolio’s worst start to a year ever in 2022. For investors who want to spice things up with alternative asset classes that tend not to correlate with stocks and bonds (private equity or nontraditional credit strategies are popular themes), something like a 55/35/10 portfolio makes sense.

“We’re superexcited about what the next decade looks like for investors,” says Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management . “It looks very different from the past 14 years. The opportunities are much more diversified and broader.”

Buying Low

Truth is, no matter how you divvy up your portfolio between asset classes, the market downturn makes this a much more compelling starting point for investors looking to put new money to work. A punishing nine months of returns has left many stock sectors considerably cheaper than they have been for years, while fixed income is actually providing meaningful income for the first time in almost a decade and a half.

“Across asset classes, one of the best predictors of future performance is starting valuations,” says Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management. “Fixed income is looking very interesting for the first time in years. And there are areas of equities that are becoming interesting as well, especially with a 10-year horizon.”

A Look Back

To understand the market drivers of the next decade, it’s important to look at the past cycle. After the 2008-09 financial crisis, the U.S. economy was characterized by slow economic growth, low inflation, rock-bottom interest rates, and quantitative easing by central banks across the globe. It was a Goldilocks environment, particularly for financial assets with longer duration—essentially those with a greater share of their cash flows occurring far off in the future. That includes long-dated government and corporate bonds, but also shares of growth-oriented companies.

That environment favored a relatively narrow group of stocks that trounced the market for most of the past cycle and came to dominate major market indexes, namely the Big Tech giants and other fast-growing, but not necessarily profitable, businesses.

“The formula that worked over the past decade was passive, U.S., growth, megacap. ...That formula will fail over the next decade.”

— Lisa Shalett, Morgan Stanley Wealth Management

The S&P 500 returned 16% a year from the start of 2009 through the end of 2021. The technology and consumer-discretionary sectors rose more than 20% annually over that period, while energy stocks returned 4% annually, financials returned 13% and industrials returned 14%. The safer end of the bond spectrum yielded little to nothing.

“The formula that worked over the past decade was passive, U.S., growth, megacap,” says Shalett. “That formula will fail over the next decade.”

Where We Are

Cash-generating investments are back in vogue for the next decade. Higher volatility adds greater uncertainty to future predictions, while higher interest rates mean that far-off cash flows are worth less when discounted back to the present, and securing financing is more expensive. That dynamic expands the universe of potentially winning stocks to value-oriented sectors, and makes bonds a real alternative again.

Don’t expect smooth sailing, however. Strategists and fund managers see an environment of structurally higher inflation and interest rates over the next decade. That doesn’t mean the 8% annual inflation we’ve seen in 2022, but something around 3% seems likely for years. The Federal Reserve will remain laser-focused on holding down inflation, and investors won’t be able to count on a so-called “Fed put” as a floor under the market, or on the distorting effects of central bank asset-buying programs, known as quantitative easing, or QE, which flooded financial markets with liquidity and pushed investors up the risk spectrum.

“It’s like a family lounging on inflatable floaties in a pool,” says Robert Phipps, director at Per Stirling Capital Management. “It doesn’t matter who the strongest swimmer is; when the water drains from the pool, everybody goes down together.”

Time will tell whether monetary policy will remain an outright drag on stocks over the next decade. as it has been in 2022. But it certainly won’t provide as much of a boost as it did in the past cycle. “The overwhelming majority of the return that investors enjoyed from equities [in the past cycle] was from valuation expansion,” says Jack Ablin, chief investment officer at Cresset Capital. “In an environment where that QE tailwind is disappearing and may even become a headwind, we now have to pay much more attention to earnings growth and dividend yields.”

Choose Wisely

Value stocks and businesses throwing off the most cash with higher shareholder returns are likely to be competitive. The S&P 500 remains overweight the last cycle’s winners; the average stock in the index could beat the index’s overall performance, which is overwhelmingly influenced by its largest-market-cap components.

There will be opportunities for stockpickers in innovative new frontiers. Labor shortages and a potential shift in supply chains closer to home will spur investments in factories that rely more on robots and automation. Renewable-energy generation will take share from fossil fuels. Genomics, telehealth, and Big Data will transform the way more people receive healthcare. Applications of artificial intelligence—whether predictive analytics, natural language processing, computer vision, or another area—will become more widespread across companies and sectors.

Success won’t go only to the companies making the technology, but also to those using it to become more productive, efficient, and competitive. “That’s a contrast to the past 14 years, which was singularly about one ecosystem,” says Shalett. “That was the smartphone-centric ecosystem of e-commerce and social media. ...Moving forward, we think the new winners are not necessarily going to be about the tech makers, but the tech takers.”

Old-school companies such as banks could fit that rubric. AI will reduce time spent on labor-intensive tasks, just as automated-teller machines did in the 1980s, reducing the need for back-office employees. More-advanced mobile apps will mean fewer physical bank branches, reducing real estate expenses.

Healthcare will go paperless, farming will be increasingly automated, and the ordering and delivery aspects of the restaurant business will be more digital. Further out, the space economy, autonomous vehicles, and advancements in genetics have the potential to be transformative investments, although many companies tied to these areas remain private today.

There are also several clear megatrends that will unfold or accelerate over the next decade. Strategists are bullish on opportunities to invest in the transition to green energy.

But don’t count out fossil fuels just yet, experts say. “There’s a scarcity element,” says Spenser Lerner, head of the multiasset solutions team at Harbor Capital Advisors. “In the last cycle, we had excess energy commodities, primarily as a result of fracking and shale production in the U.S. Going forward, energy executives teams are focused on capital returns as opposed to growing production volumes. It’s a massive shift in mind set.”

Geopolitical tensions, notably Russia’s war in Ukraine, will continue to serve as potential drivers of higher oil and gas prices. A barbell strategy of both clean and dirty energy may be the way to go for the next decade.

Venture Overseas

Another megatrend for the next decade is “deglobalization.” The rethinking of vulnerable, globe-spanning supply chains is already under way, while industries such as semiconductors deemed to be of national importance are receiving government support to bring production back home.

“Globalization was a tailwind to multinationals and to lower inflation across the globe for the past 30 years,” says Jim Besaw, CIO at GenTrust. “We’re not in that world anymore. We’re moving toward regionalization of supply chains into blocs.”

That’s a long-term opportunity for countries like Mexico, Vietnam, and the Philippines, which could see more economic activity, higher wages, and greater consumer purchasing power as a result. But there’s a case to be made for non-U.S. markets to outperform in general once the Fed is past its current rate-hiking cycle.

Stock valuations are cheaper in most non-U.S. regions, and the dollar can’t appreciate forever. Emerging markets other than China could be a good bet, because they enjoy more-favorable demographic trends than the developed world and often are commodity exporters.

There is always the potential that Ukraine, Taiwan, or other geopolitical flashpoints will turn into something much more dangerous for the world. But if that happens, we’ll all have bigger problems than our portfolios.

Amid those risks, bonds are back in vogue. With yields on low-risk short-term Treasuries approaching or exceeding 4%, having a chunk of your portfolio in the safety of U.S. government bonds makes sense.

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