Two short years ago, investors were having the time of their lives, piling into US tech, crypto, meme stocks and more, banking fast returns and then coming back for another splash of quick-fire growth.
It was a time of excitement and innovation, as new investment vehicles such as non-fungible tokens (NFTs) and special purpose acquisition companies (Spacs) appeared out of nowhere to meet demand — and investors piled in.
Young investors were leading the charge. Generation Z grew up with mobile phones glued to their hands and thought nothing of downloading a free trading app and gambling with money they didn’t have and couldn’t afford to lose.
The excitement peaked in November 2021, when the US S&P 500 nudged 4,700, Tesla stock was valued at about 1,000 times its earnings and Bitcoin peaked at $66,000.
But 2022 was brutal and new research from investment platform Saxo Bank suggests that Gen Z investors have learnt their lesson.
Suddenly, boring is beautiful, as they adopt a low-risk approach by prioritising long-term gains over short-term growth.
Peter Siks, investor trainer at Saxo, says they now favour old-school sectors such as banking stocks and real estate, with technology pushed into third place, concluding that “boring, long-term investments are the new sexy”.
And it's a trend he welcomes.
“After applying this insight, Gen Z will thank themselves when they retire.”
The best way to get build wealth is slowly and steadily, by investing small but regular amounts of money over many years, Mr Siks says.
“Investing $100 a month over 35 years with an average return of 7 per cent will earn $172,000, not adjusted for inflation.”
The return of boring is exemplified by the most successful stock market of the past year, the stodgy old FTSE 100.
The UK’s index of large-cap stocks peaked at an all-time high of 6,930 on December 31, 1999. It then lost half its value in the two years after the dot-com crash of March 2000, and has spent the millennium going nowhere slowly.
Yet it has boomed in recent months and last week burst through the 8,000 barrier for the first time in its history. It’s no longer dull but a world-beater.
The FTSE 100 was decried for its lack of exposure to tech and social media, but that is now seen as an advantage, says Jason Hollands, managing director of fund platform Bestinvest.
“In today’s tough economic environment, boring is the new sexy.”
UK blue-chip stocks are now admired as “solid companies churning out reliable dividends”, Mr Hollands says.
“The index is expected to yield 4 per cent this year, compared to just 2.3 per cent for global equities as a whole.”
The FTSE 100 also offers an abundance of exposure to low-risk defensive sectors such as energy, commodities, consumer staples and healthcare companies, Mr Hollands adds.
It is up more than 6 per cent this year, but remains “incredibly cheap” trading at a multiple of 10.7 times forecast earnings.
“This is a 32 per cent discount to global equity markets, which trade at 15.7 times earnings, according to MSCI World, one of the widest discounts in living memory,” according to Mr Hollands.
He says a simple and low-cost way to gain exposure to large UK companies is through a tracker like exchange-traded fund (ETF) iShares Core FTSE 100 Core UCITS ETF.
Christian Abuide, head of asset allocation at Swiss private bank Lombard Odier, agrees that the FTSE 100 offers an “attractive mix of defensive companies providing low growth, strong balance sheets and strong pricing power”.
“These businesses offer high levels of cash return through dividends and share buy-backs, all of which are increasingly valued by investors in today’s highly uncertain environment when expected returns are low.”
Mr Abuide also tips fixed income, such as government and corporate bonds, as another unfashionable, unexciting asset class that may now perform and makes a “worthwhile core exposure for most portfolios”.
“Fixed income may not be exciting by some standards, but it will do the hard work of getting through tough periods like this one.”
Vijay Valecha, chief investment officer at Century Financial, says the US S&P 500 index of top stocks is also creeping back into favour, having climbed 7 per cent so far this year.
For the past decade, its performance has been driven by the US tech titans but now, lower-profile, defensive sectors such as health care and financials should come to the fore.
“The S&P 500 only includes the best of the best, so it is far more likely to recover from market downturns,” Mr Valecha says.
He adds it is easy and cheap to track through the SPDR S&P 500 ETF Trust, which has delivered an average annual return of 12.42 per cent over the past decade.
That would turn an initial investment of $10,000 into a hefty $335,202 over a 30-year period, or about $1.1 million over 40 years — and there’s nothing boring about that.
The S&P 500 may struggle to repeat that performance, which came during the longest bull run in US history, but last year’s sell-off presents an attractive buying opportunity.
The shift towards boring has been driven by the end of the cheap money era, as rising inflation forced central banks to cut interest rates while governments slashed their stimulus programmes.
Mr Abuide expects today’s “disinflationary environment” to continue as the US Federal Reserve keeps interest rates high to suppress inflation, despite the risk of “some mild recessionary episodes”.
Yet he does sees the prospect of some excitement as China reopens.
“This will not only boost its own growth outlook, but also those of commodity exporters, its closest trading partners in Asia and some tourist destinations.”
Giles Coghlan, chief market analyst at broker HYCM, also favours China for those who still want a little action, saying it “should now be front and centre” in people’s minds.
“As domestic demand and exports recover following the lifting of the zero-Covid policy, the IMF forecasts that the economy will grow by 2.9 per cent in 2023,” he says. “Consequently, there could be huge opportunities for investors.”
So does the new boring have staying power? The test will come when interest rates peak and markets get their mojo back.
There are early signs that investors are positioning themselves for that moment, with Bitcoin up 43 per cent this year and Tesla doing even better, rising 85 per cent.
Let’s hope that Gen Z and other investors have learnt their lesson; that investing is about building long-term wealth for retirement, not short-term trading for instant gratification.
Being boring is the best way to achieve that. As your wealth steadily builds, it could turn out to be more fun than you think.