4 Reasons Why Investors Should Look to the Future, Not the Past
There will always be people who fear advances in technology and are hesitant to adopt them. However, historically, the benefits of technological advancements have outweighed the downsides. Technology drives growth, reduces costs, improves efficiencies and customizes experiences.
Technology also drives investment. Following are four ways technology is changing the game for investors.
#1 – Democratization
Democratization refers to the process of making something available to everyone. Consider the impact the internet has had on the spread of knowledge. Prior to the internet, if you wanted to research a topic, you had to go to a library. Or, if you were especially wealthy, you may have had your own library. The internet made an infinite amount of information easily accessible to all.
Take that a step further and consider the smartphone. Now you don’t even need a computer to access information — instead, you carry it around in your pocket. With more than 80% of the U.S. population using smartphones, even a kid in the worst part of town has access to the same information as the wealthiest person in the wealthiest part of town.
And, as technology advances, so does the rate of adoption. Consider that it took over nine decades from the time telephones were launched for 80% of households to have one. In contrast, an 80% adoption rate was achieved just 10 years following the launch of smartphones.
#2 – Dematerialization
Dematerialization is the reduction of materials needed to serve a specific function. Technological innovation facilitates dematerialization by reducing the number of things we need to function in our daily lives.
Let’s consider the smartphone again. What does it replace?
- Calendar
- Camera
- Music player
- Maps
- Notebook/journal
- In-person shopping
- Watch
Ultimately, dematerialization allows us to create more with less. Technology benefits society because it allows us to use fewer resources to produce the same value.
#3 – Deflation
In 1984, the inflation-adjusted cost of an Apple Macintosh personal computer was $6,042. Today, you can easily purchase a decent laptop for less than $700. And today’s computers are significantly smaller and more powerful than a 1980s version.
Consider also that the inflation-adjusted cost of a 20-inch color television in 1985 was $1,195. Today, a lightweight, 24-inch flatscreen costs around $150. Unfortunately, the same rules don’t apply to a Chipotle burrito, McDonald’s value meal or candy bar.
Technological advancements allow companies to operate more efficiently, which leads to lower production costs and fewer required materials. Ultimately, technology allows us to produce the same products for less, which leads to lower prices for consumers.
#4 – Disruption
Technology also leads to disruption. While disruption means the end of some businesses, it also improves consumers’ lives. Consider how we watch movies at home. Those of us who are old enough remember heading to Blockbuster on a Friday night to rent a movie. If you got there late, the most popular movies would already be checked out, leaving you a limited selection from which to choose.
Today, streaming services such as Netflix provide immediate access to a virtually unlimited universe of viewing options, all from the comfort of home. I’m always amazed when my teenagers declare “there’s nothing good to watch” when, between cable and streaming options, at any given moment they can watch thousands of different shows or movies!
Disruption benefits consumers by providing more things at a faster rate and lower price. As an investor, it’s important to look ahead at what disruptions may be on the horizon, rather than assuming the status quo will continue going forward.
All this to say the market doesn’t care about what’s happening today. It’s basing its performance on expectations for the future. As investors, we run into problems when we focus too much on what’s happening now rather than seeking future opportunities.
If you find yourself worrying about how today’s technological advancements may impact future earnings, remember that when things look bleak, technology typically leads to more benefits than downsides. Note I’m talking about financial benefits, not social or personal (which are entirely different stories).
Could you use some help positioning your portfolio to withstand future market challenges? Creative Planning is here for you. Our experienced teams help clients make smart investment decisions throughout all phases of the market cycle. For help with your portfolio, please schedule a call.
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