Will technological disruption impact your investment style?
These days, it seems we face daily advances in technology. Our personal lives have become highly dependent on the technology that other people and companies have developed. Technology has changed the way we purchase products (such as EFTPOS), the way we live, the way we communicate, the way we travel, and the way we learn. As people’s demands and lifestyles change, the demand for advancing the type of technology we use is high.
For businesses to keep up, they need to embrace technology so they can enhance their service offering, thereby improving customer service and hopefully increasing profit along the way. But what happens if these companies don’t keep pace with technology? Disruption occurs!
Disruptive technology is when technology, or the convergence of multiple technologies, is formidable enough to disrupt existing companies and industries, sometimes into extinction. History has numerous examples of industries being disrupted by innovative technology, such as the automobile replacing horses or the smartphone replacing less modern mobile handsets. It appears we are facing an innovation surge, largely enabled by technology which is accelerating the speed of disruption.
Active and passive investing
So, what does this mean for you as an investor? This will depend on whether you are an active or passive investor. A passive investor will typically buy an index fund that follows one of the major indices like the S&P500 or Dow Jones. When you own tiny pieces of thousands of stocks, you earn your returns simply by participating in the upward trajectory of corporate profits over time via the overall stock market. Successful passive investors keep their eye on the prize and ignore short-term setbacks – even sharp downturns. Active investing, however, takes a hands-on approach and often requires that someone act in the role of portfolio manager. The goal of active management is to beat the stock market's average returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and the expertise to know when to move into or out of a stock, bond or other asset.
It is this deeper analysis conducted by an active manager which will help provide a better understanding of how disruptive technologies will impact on corporate earnings over the next 10-15 years. Actively-researched investment decisions can assist future returns by investing in companies and industries at the forefront of technological change or those that are unlikely to be disrupted in the foreseeable future, like healthcare, aged care, and consumer staples. It is equally important to be able to avoid industries likely to be disrupted, such as conventional subscription TV or petrol retailing. All of this can be achieved with an active management approach.
Conversely, a passive approach to investment means investors get a slice of the entire market, without any fundamental research involved in the selection of what goes into the portfolio, for much lower fees. But how do you know whether the companies in this market selection will be impacted by the technological innovation we are seeing? The impact of disruption is in its infancy, but momentum is building with the assistance of big data (a term that describes the volunteered and observed information collected from internet users and connected objects that can be analysed to learn more about those users, things and their surroundings), the internet, processing power, artificial intelligence, robotics, and a suite of complementary technologies. It is inevitable, the future is changing what we know today. It is widely accepted that an active approach via a good quality investment manager, who has a solid track record, will be beneficial when navigating disruption.
The bottom line
Ultimately the decision to invest exclusively on an active or passive basis is a trade-off. Individuals deal with trade-offs in all aspects of life by way of personal preferences.
Knowing yourself and your investing personality can help to make a sound decision. Some investors like the allure of managing their own portfolios or picking active funds and fund managers. Others prefer to set low costs as an investing priority. For this group, indexing makes sense. Knowing yourself and your investing personality can lead to conviction with long-term investment programs.
If you would like help discussing which approach would best work for you, get in touch: