“Creative destruction" has long been regarded as an essential driver of economic growth. The term was coined by economist Joseph Schumpeter who, in his 1942 book “Capitalism, Socialism and Democracy," wrote that a capitalist economy “is not and cannot be stationary… it is incessantly being revolutionized from within by new enterprise.1 "Some worry, however, that the pace of change may be close to exceeding our ability to keep up with it. The acceleration of technological innovations and the challenges associated with adapting to them seem to point toward a tumultuous future.

Disruption Is a Fact of Modern Life

That future appears to be approaching faster than ever. Companies are finding it harder to maintain their positions in industries that are increasingly subject to disruption. According to a study by Richard Foster, a professor at the Yale Entrepreneurial Institute, the average lifespan of a company listed in the S&P 500 Index has decreased significantly over the last 60 years — down from 61 years in 1958 to just 18 years in 2012.2

The rapid adoption of new technologies plays a major part in the quickening pace of change. For example, it took only seven years for mobile phone penetration to grow from 5% of U.S. households to 50%. Landline telephones needed 45 years to achieve that same feat.3

By 2004, 65% of U.S. adults owned a mobile phone, and the best-selling models that year included relatively simple phones like the Nokia 2600. By 2015, 92% of U.S. adults owned a mobile phone, and 68% of adults owned a smartphone capable of providing high-speed Internet access, GPS directions and more.4  Nokia, a pioneer in the mobile phone industry and, for many years, the world's largest seller of mobile phones, was unable to compete with newer, more advanced offerings from Samsung and Apple despite its position in the market. The company ultimately sold off its mobile business in 2014.

It's not just the U.S. that's experiencing rapid change. In some cases, emerging markets are seeing even faster adoption of new technologies. Between 2007 and 2013, several countries, including China, Mexico and Pakistan, saw the number of adults who own mobile phones rise by double digits. In Kenya, mobile phone ownership increased by 49%.5

Smartphone technology is a prime example of how technologies that once seemed futuristic or revolutionary quickly become the baseline to which everything is compared. It's an important lesson to remember as we begin to learn more about other seemingly fanciful technological advances whose impact may seem far off in the future. Uber is already testing driverless cars on the streets of Pittsburgh. Amazon is working with the British government to expand testing of its delivery drones. The Associated Press has partnered with a firm called Automated Insights, which describes itself as “an artificial intelligence platform that generates human-sounding narratives around data," to generate reports on minor league baseball games.

An age of automation appears to be on the horizon. One study from Oxford University claims that about 47% of total U.S. employment is at “high risk" of automation or computerization, perhaps within the next two decades.6

There's More to the Story

While such transformations may seem unprecedented, the truth is that we've been here before. Over the course of the 20th century, advances in technology caused employment in many labor-intensive industries to decline sharply. Between 1910 and 2000, the number of farmers and farm laborers declined by 96%. The number of mine workers dropped by 95%. This was partly due to increased efficiency and productivity in these industries — farms needed fewer people to cultivate crops as mechanized tractors replaced horses and mules, for example. However, the Bureau of Labor Statistics (BLS) points out that much of this change was, in fact, driven by the “rapid growth in demand for workers in other occupations," such as engineering, accounting and clerical work, which offered higher pay and better working conditions.7 To focus on what was lost to technological progress and not appreciate what was gained is to tell only half the story. As some industries and jobs become more efficient or are made obsolete, newer industries and jobs tend to rise to take their place.

Indeed, we can already see this occurring today. Between 2008 and 2012, the coal industry shed almost 50,000 jobs, but the energy sector overall gained more than double that in the same time span.8 Though many of those coal jobs may never come back, the BLS projects that the fastest growing occupation in the next decade will be “wind turbine service technician." 9

The potential for disruption is wide ranging, and while the effects of advances in areas such as the mobile Internet, alternative energy and autonomous vehicles are already beginning to manifest themselves, there are other catalysts of change still developing. The proliferation of sensors and network connectivity in everyday objects — the so-called “Internet of Things" — could provide us with a vast reservoir of data from which we can generate new ideas and opportunities. 3D printing technology might allow for the on-demand production of goods, which could greatly impact manufacturers, retailers, shipping companies and consumers. New breakthroughs in artificial intelligence may extend automation out of the realm of labor and into knowledge-based industries such as health care, legal services and finance.

You Can't Predict the Future; You Can Prepare for It

The key words here are: could, might and may. It's impossible to know precisely what technologies will find success and when or how it will happen. It's also hard to determine whether they will live up to the hype and find a market among consumers. Regulations or a lack of governmental support could stifle adoption, as well. For instance, the reason Amazon is testing its delivery drones in the U.K. is because of a U.S. Federal Aviation Administration rule requiring that drones be kept within the line of sight of their operator at all times.

What we do know, however, is that change is inevitable. And while investors may not be able to pinpoint precisely which companies or industries will lead the disruption — or fall victim to it — they should do what they can to plan to take advantage of these opportunities when they arise.

Investing in private equity can provide exposure to the next wave of new technologies. Venture capital firms like Accel Partners (one of the earliest investors in Facebook) are dedicated to identifying, nurturing and capitalizing on the next big thing, with a track record of success in discovering new companies that have substantial growth potential. As an asset class, private equity is attractive because it acts as a diversifier in an investor's portfolio. It has a lower correlation to traditional asset classes, such as stocks or bonds, potentially reducing portfolio risk. But most importantly, the inefficiency that exists in the private equity market means that there is tremendous potential for enhanced returns, particularly when working with the top firms — though, naturally, there is also exposure to significant risk. Compared to the more efficient, traditional asset classes, in which the universe of investments is mostly well understood, the focus on smaller, newer endeavors in private equity gives the most skilled managers the ability to take advantage of market inefficiencies.

That's not to say, however, that investments in public markets cannot be positioned to take advantage of disruption. Active management can help steer investments toward companies or industries that are poised for success or away from those that seem destined to fail. Actively managed strategies employ portfolio managers who are continually looking for opportunities to get an edge on the market, choosing which securities to invest in through a combination of research, analysis and experience. If we accept that change is inevitable and that new innovations will supplant established ideas, relying solely on passive strategies that aim to replicate the return of the broader market would be passing up an opportunity to capitalize on this ever-increasing churn.

New Challenges Present New Opportunities

The change that comes from creative destruction and disruptive innovation is not without its challenges. Navigating these changes requires an effort on the part of investors, corporations, governments and individuals to address the shifting needs of the market and those affected by it. But we cannot halt the march of progress any more than the 19th century Luddites who rebelled against powered looms. As such, prudent planning is required so we can recognize and benefit from new innovations and ensure that the positive effects that could come with them — new opportunities, higher standards of living and increased personal freedom — outweigh the downsides.

1. Schumpeter, Joseph. “Capitalism, Socialism and Democracy" (1942)

2. Foster, Richard. “Creative Destruction Whips Through Corporate America" (2012)

3. DeGusta, Michael. MIT Technology Review. "Are Smart Phones Spreading Faster Than Any Technology in Human History?" (2012)

4. Anderson, Monica. Pew Research. "Technology Device Ownership: 2015" (2015)

5. Pew Research. "Emerging Nations Embrace Internet, Mobile Technology" (2014)

6. Frey, Carl Benedikt and Osborne, Michael A. “The Future of Employment: How Susceptible Are Jobs to Computerization?" (2013)

7. Wyatt, Ian D. and Hecker, Daniel E. The Bureau of Labor Statistics. “Occupational Changes During the 20th Century" (2006)

8. Mooney, Chris. The Washington Post. “Study: Coal Jobs Lost Nearly 50,000 Jobs in Just Five Years." (2015)

9. The Bureau of Labor Statistics. “Fastest Growing Occupations, 2014–2024" (2015)

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