10 trends to watch in finance for 2013
Barry Ritholtz



It’s a winter ritual: Seers, prognosticators and other gurus tell us which stocks to buy for the year ahead, where they think the Dow will close in December and which momentous events will take place.

History teaches us that the majority of these charlatans will be wrong, and the ones who get it right are mostly lucky. If you have been reading my column for any length of time, you know to ignore them. (See 2011’s Forecaster Folly.)

When it comes to predictions, I do the following: Note down the forecasts made this month and look back at them in a year. Repeat every year. I use my desktop calendar and an e-mail Web service called Followupthen.com to keep me on track. I started doing this almost a decade ago, and I found it terribly liberating. It will be always be instructive, and, as with the class of 2008 forecasters, occasionally hilarious.

Doing this taught me to ignore the forecasts I see or read, as well as to keep the piehole in the middle of my face closed whenever anyone asks me for a forecast. I defer, saying, “I have no idea. No one does.” It is fun to watch the TV anchors’ heads spin like Linda Blair’s in “The Exorcist.”

A better use of your time? Discern what’s happening here and now. It’s been my experience that investors spend so much time worrying about what might come next that they miss what just happened.

To that end, let’s look at what’s driving the world of finance. Major shifts have already taken place, and if you understand what they are, it will help your financial planning. From my perspective, these are the more significant trends that will probably continue into 2013:

1. ETFs are eating everything.

The revenge of John Bogle continues apace. As investors figure out that they are not good at stock-picking or managing trades, they have also learned that most professionals are not much better. Paying high mutual fund expenses to a manager who underperforms a benchmark makes little sense. This realization has led to the rise of inexpensive exchange-traded funds and indices.

This “ETFication” has obvious advantages: low costs, transparency, one-click decision-making. ETFs are accessible through the stock market for easier execution, with no minimum investment required. Even bond giant Pimco recognized this trend and created an ETF version of Bill Gross’s flagship vehicle, the Total Return Fund. Pimco actually charged more for the ETF than its mutual fund to prevent an exodus of investors from the world’s largest bond fund. This will eventually shift.

Note that Bloomberg, Yahoo Finance and Morningstar all have robust ETF sites that are free (Morningstar charges for some data).

2. The financial sector continues to shrink; advisers continue to leave large firms for independents.

Since the financial crisis, Wall Street has shrunk considerably. According to the Bureau of Labor Statistics, there were about 7.76 million people employed in finance and insurance as of November. That’s down almost 10 percent from the pre-crisis 2007 peak of about 8.4 million workers.

Its more than the crisis: Technology and productivity gains make it easier to operate with fewer workers. My office is a perfect example: Twenty years ago, it would have taken a huge staff to manage the assets we run, handle all the administrative functions, take care of the monthly reporting and manage compliance. What would have taken two dozen people in the 1980s is easily managed by five people today. Oh, and everyone in the office is required to do research or publish commentary. That would have been impossible 30 years ago.

Over the past 40 years, the financial sector over-expanded. Much of what is happening on Wall Street now reflects the process of reversing that excess capacity.

3. Increased pressure on fees and commissions.This trend predates ETFs and Wall Street shrinkage; highly paid people are being replaced with cheap software and online services. This is likely to continue for the foreseeable future.

This is a very good thing for investors: Academic studies have shown that fees are a drag on returns, and lowering these costs is a risk-free way to improve your returns.

4. Hedge fund troubles.This was not a stellar year for the hedge fund industry. First, there was the issue of underperformance, with the hedgies getting stomped — they underperformed markets by 15 percent. Although being beaten by the market is part of the business, it must be tough explaining to clients why an $8 ETF outperformed a service for which they were being charged 2 percent plus 20 percent of the profit. Then there were the legal troubles and insider-trading indictments. A few high-profile closings also hurt the industry’s reputation.

What the industry has going for it is human nature (also known as “greed”). At the first sign of outperformance, the formerly skittish client base will come stampeding back.

5. Dispersal of financial news.As the finance industry gets smaller, the media that covers it is also shrinking. If investors are moving away from stock-picking, there is less of a need for the chattering classes to tell you all about it. That is reflected in a variety of ways: Cable television channel CNBC’s ratings plummeted, and Dow Jones shuttered the 20-year-old magazine SmartMoney.

At the same time, alternative sources of news are rising. Blogs continue to be a source of intelligent analysis and commentary; Twitter has become the new tape/newswire. And start-ups such as StockTwits allow traders and investors to share ideas in real time. (Disclosure: I am an investor in StockTwits.)

6. Demographics are a huge driver.I am not in the camp that believes demographics are the be-all-end-all, but one should not underestimate how significant a factor they are. The aging of the baby boomers is affecting housing (they are downsizing), job creation (they are working longer), investment planning (they have been heavy bond buyers) and generational wealth transfer (it’s a-comin’).

The pig is still moving through the python, and the ramifications will be felt for years.

7. The death of buy-and-hold has been greatly exaggerated.Investors have a tendency to take the wrong lesson from recent experiences, and this one is no different.

Buy-and-hold investors don’t have a lot to show since the market peak — 2000 or 2007 — but that is more about valuation than anything else.

Since the punditocracy declared the end of buy-and-hold investing, something interesting has happened: Ten-year buy-and-hold returns became half-decent. Time has moved today’s 10-year-return start date near the post-2003 dot-com bust lows (March 2003). And three-year returns have outperformed both tactical portfolios and global macro as an investment style.

The lesson here is not that buy-and-hold is dead. Rather, it’s that when you begin investing and the valuation you pay matter a great deal to your returns.

8. What hyperinflation?

The deficit scolds have been warning for years that hyperinflation is imminent. I have been hearing these ominous warnings my entire adult life. “This is unsustainable! Inflation is about to explode!” But inflation has been rather tame, and we are not experiencing anything remotely like hyperinflation.

They keep using that word “unsustainable,” but with all due respect to Inigo Montoya, I do not think that word means what they think it means.

9. The bond bull market has ended/interest rates are spiking.Similar to what we keep hearing about hyperinflation, we have also been told that the bond market’s bull run is over and that rates are about to go much higher. Indeed, we have been hearing this for nearly a decade.

If you make the same prediction annually, you will eventually be right. Of course, that prediction will be of absolutely no value to anyone. I hereby declare that after three years of the same wrong forecast, you lose your pundit’s license. After five years, you must shut it — forever.

10. The Fed still holds the system together.

This is the one trend that rules them all: The Fed has held the system together with a combination of ultra-low rates and massive liquidity injections known as QE, or quantitative easing.

Without this extraordinary intervention, the United States would probably be in a deep recession, home foreclosures would be considerably higher and major money-center banks would either be begging for another bailout or declaring bankruptcy.

The announcement of QE4 means that this trend is likely to continue for the foreseeable future — and perhaps even further.

You may not have thought all that deeply about these trends, if at all. But I can assure you that understanding these forces is much more productive than reading someone else’s guesses as to what may or may not be true one year from now.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter: @Ritholtz.

Category: Finance, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “10 Trends to Watch in Finance for 2013”

  1. imdumb says:

    Hi Barry,

    nice post, I’ve got a question about “and generational wealth transfer (it’s a-comin’)?” Thats a dense and rather complex issue, can you parse this out further? In which i mean, what do you mean its coming – beyond the obvious, that were all going to die and estates will transfer?

  2. Rightline says:

    Always appreciated. A request from a loyal reader for a resource of in depth post about ETF’s. I know they are a great tool you use alot. I think it would be a great service to explore issues like fees, liquidity, if levered products are worthwhile and slippage, asset classes best served, taxable vs tax sheltered use, etc….thanks for all you do.

  3. Melvis says:

    Question on number 10. At some point I assume the Fed will fail in their manipulations. When? What is the most probable consequence? Inflation or deflation?

  4. SecondLook says:

    About generational wealth transfers. Some years ago I looked at it as one of those not often mentioned factors that would affect our society, both in terms of retirement assets, and the possible consequences for various investing assets.

    I just took a quick search on some of the latest data. I’ll quote from what seems to be a good source:

    …according to a MetLife study, Baby Boomers still stand to inherit quite a bit from their Mature parents. They estimate that over the next couple of decades Boomers will inherit nearly $12 trillion. According to the study, roughly two-thirds of Boomers will receive inheritances and the median inheritance or transfer will be about $64,000.

    That pales in comparison to what Accenture estimates that the Boomers will leave behind. According to their study, released in June of this year, Boomers will bequeath or transfer over $30 trillion to their heirs, mostly Millennials, over the next 30 to 40 years. The rate of transfer will start to peak in about 15 to 20 years.

    Keep in mind that this transfer will likely be as asymmetric as is the distribution of total wealth is in the United States, i.e the top 20% of households own about 89% of all wealth (excluding homes, about 95% of all financial assets).
    While there is some social mobility in the States, most inheritors are very likely to be in the same, or nearly the same economic quintile as those they are receiving from. So, this generational transfer isn’t going to have any significant affect on the bulk of the population.

  5. jonblogden says:

    I’m curious about #2, regarding size, because while I agree that # of employees represents an important data point, I’m unsure about whether it’s the best data point for measuring size. After all, Amazon.com could fire a bunch of employees and replace them with robots, and yet we wouldn’t say in that case that Amazon shrunk.

    Assets and deposits have increased in the financial sector since 2008, and so I’m curious why the post didn’t use those data points as measurements.

    Also, I should say, this a great post.

  6. blackjaquekerouac says:

    haven’t been here in a while…see things don’t change much. “charlatans” is an interesting term for “Wall Street traders”…but it’s more than a living. It’s a way of life..and right now they’re making a fortune. I stick with index funds because i’m small time and know my place. the big boyz are playing the LBO game, the M&A game, the securization game…etc, etc. Compared to the Bush years this is a tame time indeed. Anyone who actually believes in Buy and Hold IS dead…the fact of the matter is decisions must be made when to buy and when to sell all the time. “staying the course” happens to be right…for now…but i would argue that over the next three months (a 1998 scenario in equities) could change that dramatically. i completely disagree with your views on the media…while Media Crimes are at an all time high (unreported since the Senate has yet to pass the appropriate safeguards to make what is being done illegal in the first place…Texas on the other hand….) the actual “dispersion” of media is one of those things that has completely changed the game…granted instead of “hiring” the media companies are simply stealing. I expect nothing from Government since they live in sheer terror of their own shadows…and soon they will have the real terror of militant Islam to add to the list. The West really is shaping up to be just as pathetic as the East makes us out to be. And finally…”the economy.” yes there is such a thing, yes it matters now more than ever, yes we have our best and brightest enrolled and studying it (thank God) and yes those that survive the reality of THIS economy will soon discovered the need for their profession…expertly given of course…to be of the highest order of magnitude. the fact of the matter is the Federal Government is only now using information technology to get a handle on their need for a “bang for the buck” review of all Federal Programs. some of these…should they be discontinued…will result in an enormous loss to the American people. How the Government not only pays for things but also even makes things. It might have to start “making things in bulk” should the systemic failure of the West’s most basic structures now be overlaid with outright Islamic invasion…both from within and without.

  7. SomeGuyNamedDave says:

    Item 8. Inigo Montoya was seeking to avenge the death of his father; Vizzini was the one saying various things were “inconceivable”.

  8. RW says:

    Bad link to class of 2008 forecasters in your post (file not found).

  9. barbacoa666 says:

    The trend toward ETFs will create opportunities for some smart investors. Both long term and traders. But still, most people will be better off with ETFs.

  10. Old Rob says:

    With this trend, won’t EFTs morph in to stocks? Won’t the ETFs becoming tight sectors?

  11. CFD Trading says:

    I am not so sure about the FED holding it together for ever. I think much depends on the hegemony of the USA in the world and with that the artificial blind trust in the dollar.

  12. Derektheunder says:


    I think BR is just giving Inigo credit for the line he’s stealing, as he is the one who said, “I do not think that word means what you think it means” to Vizzini.