Alex Shahidi, JD, CFA, CFP, ChFC, CIMA, is a Managing Partner and Co-CIO at Evoke Advisors, and Host of The Insightful Investor Podcast.
getty
Every investor makes assumptions. The most important ones are often the assumptions we don’t realize we’re making because they develop through experience. Over time, economic conditions, government policy, business trends and market behavior form how investors think about the future.
Many of today’s investment assumptions were shaped by an unusually favorable environment that emerged in the early 1980s: low and stable inflation, falling interest rates, expanding globalization, increasingly efficient supply chains and exceptional U.S. equity performance.
Those assumptions made sense at the time. But environments evolve. The question isn’t whether yesterday’s assumptions were reasonable. It’s whether they still fit the investment environment that may emerge over the years ahead.
Cheap capital became familiar.
Interest rates generally trended lower for nearly four decades. Following the 2007-2008 global financial crisis, they fell to exceptionally low levels and remained there for well over a decade.
Many investment strategies, from private equity to real estate, benefited from inexpensive financing and abundant liquidity. Since 2022, higher rates have increased financing costs and challenged parts of the investment landscape. Yet the impact has not been uniform. While some sectors have faced valuation pressure and reduced liquidity, U.S. equities have remained relatively resilient, supported by strong earnings growth and enthusiasm surrounding artificial intelligence.
No one knows where rates ultimately settle. However, after four decades of generally falling rates and more than a decade of near-zero rates, it may be easy to underestimate how unusual that environment was and how deeply it influenced investor expectations.
The lesson may not be that higher rates affect all assets equally. Rather, they may reveal which sectors depend most on inexpensive financing and which benefit from other sources of support. Whether those supports prove durable may ultimately depend on whether companies continue to exceed already lofty expectations.
Low inflation may not be normal.
For decades, investors operated in a world of relatively low and stable inflation. That stability influenced far more than prices. It also made monetary policy considerably more predictable.
When growth weakened or markets came under pressure, central banks generally had room to lower interest rates without worrying that inflation would become a major constraint. Investors became accustomed to a relatively straightforward playbook.
Looking further back, however, the historical record tells a different story. Over much of the past century, inflation was considerably more volatile than it has been since the early 1980s. Viewed through that lens, the low and stable inflation environment that many investors came to regard as normal may actually have been the exception rather than the rule.
Globalization, increasingly efficient supply chains and relentless cost reduction helped suppress inflation for decades. Some of those forces may now be reversing. Many companies increasingly emphasize resilience through more diversified supply chains, reshoring and greater attention to energy security.
Some economists have also argued that rising debt burdens and persistent fiscal deficits may create conditions that are more supportive of inflation than many investors anticipate. Inflation has remained above the Federal Reserve’s target for more than five years, potentially signaling that the environment is changing.
None of this points to permanently high inflation. It may, however, suggest investors should be cautious about assuming the unusually low and stable inflation environment of recent decades will persist indefinitely. If inflation becomes more volatile, monetary policy may become less predictable, with implications for markets, valuations and portfolio construction.
Technology doesn’t necessarily translate into returns.
Investors sometimes assume that identifying a transformative technology is the same as identifying an exceptional investment opportunity.
The decade following the technology bubble provides a useful reminder. The U.S. remained the epicenter of the internet revolution as internet adoption, e-commerce and computing power surged. Yet U.S. stocks generated negative returns for the decade and were among the worst-performing major equity markets in the world during the 2000s.
What many investors misjudged was the price they were paying for that future.
The same distinction may matter today. Artificial intelligence may reshape industries, improve productivity and create enormous economic value. But the investment question is whether current market prices already reflect a meaningful portion of that future success.
History suggests an investor can be right about a technology’s long-term impact and still be disappointed by investment returns if lofty expectations embedded in market prices prove difficult to exceed.
Valuations matter—and leadership changes.
History suggests that market leadership changes far more often than many investors may assume.
Looking back decade by decade, the largest companies in the market rarely remain the largest companies in the following decade. Competition, innovation, regulation and valuation cycles have historically produced new winners.
Today’s leaders earned their positions by consistently exceeding expectations. As a result, expectations have risen considerably. Future returns may depend less on whether these businesses continue to perform well and more on whether they continue to outperform what investors already anticipate. Even extraordinary companies can generate disappointing returns when expectations become too ambitious.
History suggests investors should be cautious about assuming today’s winners will remain tomorrow’s winners.
This is the real risk.
None of these observations are intended as predictions. They are simply reminders that many assumptions investors hold today were shaped by a particular economic and market environment.
That environment may persist—or evolve in meaningful ways.
Rather than attempting to predict the future, investors may benefit from periodically revisiting the assumptions embedded within their portfolios and considering how they might behave across a wider range of outcomes.
Investment success often depends less on forecasting what comes next than on recognizing when yesterday’s assumptions no longer provide the same guidance they once did.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
