In 1997, Neil Howe and William Strauss published “The Fourth Turning” which goes into detail on how history moves in 80-year cycles and each one is divided into periods, defined by each generation (i.e., Baby Boomers, Generation X and Millennials) as they come into adulthood. Each of these phases hold one generation at a time, and each phase is associated with a specific societal role. Most importantly, in each human life cycle, society goes through four major turning events as each generation passes from one phase to the next. These four phases are High, Awakening, Unraveling and Crisis. Howe has tied these phases to season of the year. The Awakening is the summer while the Crisis is the winter and the unraveling (fall) and High (spring) are the transition seasons.
The end of the cycle or the “Crisis” phase is also known as the “Fourth Turning” when the hero generation, entering young adulthood, faces off against the prophet generation that is entering elderhood. In this case, it is the Boomer Generation retires and the Millennial generation takes the wheel. It has been suggested that this phase only ends when the eldest Boomers move beyond the age of political leadership and retire from public life and Gen Xers begin to retire and move into the senior role, Millennials begin to move into midlife and take over society’s institutions and those younger than Millennials are just beginning to join to society.
Howe and Strauss predicted that the start of the Fourth Turning would have been 2005, plus or minus a few years. With this in mind, it appears the 2008 Financial Crisis was the trigger for the move into the current Fourth Turning. They predicted a climax coming around 2020 and the resolution, including a “Great Devaluation” as the economy is entirely restructured for a new set of circumstances, around 2026.
If we think about the world that we live in today there are similarities – a pandemic, racial and social unrest, and a contentious election that is now behind us – with the fourth turning that Howe and Strauss discussed. It is important to note that it is during these Fourth Turnings when crises tend to be solved rather than pushed under the rug.
If the fourth turning does lead to a reset by 2026, we need to be prepared for disruption on a mass scale. Permanent changes in our culture and the markets are happening, causing uncertainty across the board. Some predict that we will see a transformation led by millennials to defund Government led initiatives such as Medicare, social security and pensions and grow the community side of the government. We will likely see accelerated growth of household sizes, as generations combine due to the pandemic repercussions and there may be a shift in what we were once willing to pay for and what we are now willing to do ourselves.
So how will this impact your investments? Well, it is difficult to make any short-term actionable changes in an investment portfolio based on this prediction. This means you need to continue to focus on your long-term investment goals and avoid the noise, when you look back historically, markets have always recovered from turmoil and they have also gone on to reach new highs. A long-term investment strategy consists of 1) diversification and 2) patience. When it comes to diversification, your portfolio should consist of a balance across assets. Patience is the toughest challenge, when the market is going up and down, it is easy to doubt the original strategy you came up with, but your safest bet is to trust your strategy and stay committed. Many investors begin to move assets around when fear comes in, while that might come with short term gains your risk dramatically increases by playing this game which is why sticking with your plan is so important.
At Client First Capital, our goal is to help you come up with the right financial plan that aligns with your time horizon and risk tolerance. We look at your portfolio with a “big picture” lens by anchoring 70 to 80% of your portfolio on long-term asset allocation that is based specifically on your situation, then we focus the remaining 20 to 30% of your portfolio on all of the different shifts in GDP and inflation, to manage downside risk. This approach sets your portfolio up to grow sustainably over time and helps you achieve your financial objectives.