The biggest mistake investors often make is to focus on a company or an industry while ignoring the broader macro environment. As an investor, keeping track of changes in the economic environment can help protect you against any sudden or dramatic shifts in the years ahead.
For example, as the time spent online grew throughout the last decade, investors in newspaper stocks should have seen that consumers would eventually have less need for a daily paper. For those heavily invested in dailies, the shift has been a stark wake-up .
But if you're overexposed to even a few -- possibly shocking -- hiccups along the way, it can wreak havoc on your portfolio. Read on to sort out the good trends from the bad.
1. The end of pensions. It’s been many years since a major company decided to initiate a new pension plan. Led by IBM’s (NYSE: IBM) move a decade ago, many firms are slowly weaning existing employees away from pensions (defined benefit) into 401(k)s and IRAs (defined contribution). Especially in the public sector, many older workers and retirees are at risk of seeing their promised pension benefits either cut or eliminated as state and city services are dealing with reduced budgets and debt acquired from extended payouts to unemployment payments.
A generation from now, there may be very few people left that are still receiving pension benefits. That’s why it’s crucial to take hold of your financial future now by creating your own "pension plan" via savings. Establish a long-term savings plan, and also keep in mind that your peak earning years should also be considered as your peak years for savings.
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2. A shrinking government workforce. Over time, federal employment is likely to shrink. An unavoidable casualty of the coming efforts to fix state, local and federal budget deficits be a long-term shrinkage in the base of public employees. That will likely curtail any new openings for teens and 20-somethings looking to get into teaching, police work, firefighting or the Department of Motor Vehicles.
With many traditional jobs becoming harder to come by, it pays to research growth areas. Right now, the U.S. appears to have a shortage of engineers, IT administrators and nurses. That’s why more people are going back to school to develop new skills and gain experience. These areas may be worth a look if you’re considering a career change or plan on joining the workforce soon.
3. U.S. gasoline consumption has peaked. The move to increased fuel efficiency in cars has led to a slight drop in gasoline consumption in each of the last two years. Government-mandated fuel economy standards are set to tighten sharply in coming years, and even if watered down a bit as the carmakers hope, still implies that within the next five years we’ll be driving cars that get 40 to 50 mpg on the highway. In addition, a rising number of cars and trucks will be able to run on natural gas in the coming years -- all leading to a steady decline in U.S. oil imports.
While natural gas prices may have fallen from their 2008 peak, rising demand should help to reverse that trend in coming years. Companies such as Chesapeake Energy (NYSE: CHK) or Devon Energy (NYSE: DVN) are often considered to be savvy plays on natural gas.
5. Weaker dollar revives the Rust Belt. Recent economic data points to a modest uptick in hiring at factories. Either through careful global coordination – or an unexpected exogenous shock – the U.S. dollar will lose 10% to 20% of its value against a basket of currency in the next half-decade, setting the stage for a more robust renaissance in the industrial sector. The process will likely take several years to unfold. One way to take advantage of this growth is through Vanguard’s exchange-traded fund (ETF) that focuses on this sector, the Vanguard Industrials (NYSE: VIS).
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While you can't predict the future, keeping track of these changes to the economic landscape can help protect against any sudden shifts in the years to come, and if played well, could even work to your advantage.