The U.S. share of the world stock market will drop by half.
The next few years will be all about lower fees and better disclosure, both of which will be great for individual investors. We've already seen lower-cost managed funds and very low-cost index funds become popular, but expect them to become even more dominant.
That's because more people will begin to realize that low transaction costs are the ultimate consumer benefit: They put more money in your pocket without additional risk. You'll also see financial service firms lower fees for other products, including life insurance, banking and mortgages, in order to compete more effectively for your business.
As for better disclosure, we'll soon see the devastation wreaked on families who were not adequately warned about the risks of adjustable-rate mortgages. That will prompt a public outcry for full disclosure of borrowing costs. The public will also demand full disclosure of costs and risks (including the risk of inflation) for mutual funds, annuities and other savings accounts.
All this has major implications for the financial services industry. Financial services is currently the most profitable sector in the S&P 500 - its share of corporate earnings rose from 5 percent in 1980 to an estimated 33 percent in 2007 - but that can't continue. With low-cost pressures increasing, the profitability of this sector will inevitably diminish.
Thirty-five years from now, the way we put our money to work will be radically different. We'll learn from experience and focus on the wisdom of investment rather than today's foolish (and costly) focus on the folly of speculation. Most of us will buy and hold a diversified portfolio of corporations for the long term. We'll do far less swapping of pieces of paper with one another, as we do today in trading stocks back and forth, in hedge funds, in exchange-traded funds, and in complex derivative securities.
Look for the Dow Jones Average to reach around 70,000 in 2042 - but realize that's only about 28,000 in today's purchasing power, a modest double. As the economies of China, India, and Southeast Asia surge, the U.S. share of the value of the world stock market, now nearly 50 percent, will decline to 25 percent. That means your investment portfolio will no longer be largely local, but truly global.
