What's in Store for the Next Decade

We expect increased inflation, higher interest rates and tepid home-price gains, but also steady advances in green energy and biotechnology.

Uncle Sam: Bulking up

Bigger government, with more regulation and higher taxes, could mean slower-than-normal economic growth, higher interest rates and inflation, and continued weakness in the dollar.

The federal budget picture is ugly. Goldman Sachs projects that the U.S. will rack up $10.5 trillion in cumulative budget deficits over the next decade. Both Americans and overseas investors, who buy half of our Treasuries, will at some point balk at the low yields they get for lending to a profligate Uncle Sam. This will push interest rates up and the dollar down.

Gold is one form of insurance against a declining currency. You can buy gold through an exchange-traded fund, such as SPDR Gold Shares (GLD), or in mining stocks through a mutual fund, such as Vanguard Precious Metals & Mining (VGPMX).

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The likelihood of higher income-tax rates bodes well for municipal bonds because tax-free income will become more valuable. But state and local budgets are a mess, so stick with high-quality issues and keep maturities short. For fund investors, Fidelity Intermediate Municipal Income (FLTMX) is a winner.

Changes in the tax code are usually bullish for tax-preparation firms. The big players are H&R Block (HRB) and Jackson Hewitt Tax Service (JTX). -- Andrew Tanzer

Interest rates: On the rise

The era of sweet deals for borrowers and raw deals for savers may last another year. After that, interest rates should start to creep up. The Federal Reserve Board will surely raise the short-term rates it controls to prevent inflation from taking root and to defend the dollar. Investors will demand higher long-term yields in response to inflation fears and a massive supply of new Treasury bonds.

The low rates of the past decade were an aberration. Since 1962, the median annual yield for ten-year Treasury bonds has been 6.44%. Rates will reach those levels again over the course of the next decade. But there’s no reason to fear a return of the double-digit interest and inflation rates that marked the late 1970s and early ’80s. A glutted real estate market, crowds of people looking for work, and the price-constraining impact of faster telecommunications and more-powerful computers will combine to hold down inflation.

In this kind of environment, keep maturities short on your fixed-income investments. Anchor your savings with a ladder of certificates of deposit or high-quality bonds maturing in one to five years. If you buy funds, consider steady Eddies, such as Vanguard Short-Term Investment Grade (VFSTX). And keep a healthy dose of Treasury inflation-protected securities. -- Jeffrey R. Kosnett

Tech: More personal

If technology is advancing too fast for your taste, brace yourself: The pace of innovation is only going to accelerate. The next few years will bring dramatic changes in how we browse the Web and use our mobile phones. A three-dimensional style of Web navigation -- made possible by speedier processors, broader Internet bandwidth, and a boost in computer and phone storage -- will become commonplace.

So instead of browsing online photos of that Porsche you want to buy, you’ll virtually enter a showroom, walk to the car, step inside, and check out the dashboard and controls. All you’ll miss is that new-car smell.

Your cell phone will replace your credit card. In parts of Asia and Europe, people already use their phones to pay for parking meters and vending machines. And security will be provided by multiple biometric scanners built into phones, including devices that examine your voice, retina and blood-vessel patterns.

Wireless operators such as AT&T (T) and Verizon Communications (VZ), which owns a majority of Verizon Wireless, are positioned to benefit from mobile-phone transactions.

T. Rowe Price Global Technology Fund (PRGTX) is well diversified, with large holdings in Apple (AAPL), maker of the iPhone, and Google (GOOG), the brains behind the Android operating system. -- Jeff Bertolucci

U.S. consumers: Tapped out

High unemployment, sagging wages and shrinking credit have transformed the U.S. into a nation of cautious spenders. Instead of buying what they want when they want it, Americans have grown gun-shy, searching for deals and restraining their urge to splurge on luxury items.

The “new frugality” isn’t likely to go away anytime soon. In fact, says Diane Swonk, chief economist at Mesirow Financial, consumers may be entering an era in which they have no choice but to spend within their means, mainly because of reduced home-equity borrowing and a contraction in credit-card use. That means consumer spending will stay sluggish by historical norms. Swonk sees spending rising by only 2.4% in 2010, versus the 5%-plus increases during the go-go years of the 1990s.

Cash in on the cautious-consumer trend by buying stocks of companies that cater to thriftiness. Top picks include retailers such as Wal-Mart Stores (WMT) and Family Dollar (FDO). Firms that market to homebodies, such as Netflix (NFLX), should also thrive. Finally, consider firms that manufacture staples, such as cereal maker General Mills (GIS) and consumer-goods giant Procter & Gamble (PG). They should be able to generate steady profit gains regardless of economic conditions. -- Laura Cohn

Homes: Leaner and greener

The housing bust, rising energy prices, clogged commuter routes and retiring baby-boomers are conspiring to upend the American dream. Instead of a McMansion in the far-flung suburbs with a big yard and a three-car garage, the most desirable homes will be smaller, “green” houses in pedestrian-friendly neighborhoods close to job centers.

Newly built homes have already shrunk a bit, as they did during the previous two recessions. But this time the trend will stick as boomers downsize and echo boomers enter the market. Younger buyers will have to scale back their expectations because of declining real incomes, tougher lending standards and less access to “Mommy money” as parents try to rebuild their retirement accounts. Don’t expect your home to be a source of fast-rising equity to borrow against. Most markets will see home-price appreciation that’s just a bit higher than the inflation rate.

Builders are already on the prowl for sites close to job centers. Companies that hold little land in inventory, such as Meritage Homes (MTH), MDC Holdings (MDC) and NVR (NVR), are likely to succeed. With their strong balance sheets, they are in a better position than other builders to buy properties selling at beaten-down prices. -- Patricia Mertz Esswein

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Green energy: Slow growth

The trend may be toward cleaner and “greener” energy, but the world will remain dependent on messy fossil fuels over the next decade and beyond. Finding new sources of oil and gas, and wringing more production out of existing fields, will become increasingly costly. The International Energy Agency says we’ll spend $26 trillion to meet demand through 2030. Giants such as ExxonMobil (XOM) and Schlumberger (SLB) will get their fair share of this investment.

Among alternative fuels, expect solar, wind and nuclear to draw the bulk of investors’ attention. Biofuels will gain ground in the U.S., Brazil and elsewhere, particularly as researchers succeed in turning raw materials, such as wood chips and cow manure, into fuel sources that don’t diminish the food supply.

In addition, you can expect breakthroughs in efficiency. Consultant McKinsey & Co. estimates that advances such as better lighting and energy-management systems will cut expected energy demand through 2020 by 23%, and you’ll see improvements in hybrid cars and batteries. Instead of trying to spot winners among these emerging technologies, buy a basket of stocks via Market Vectors Global Alternative Energy (GEX), an ETF, or Winslow Green Solutions (WGSLX), a mutual fund. -- David Landis

Seniors: A bigger force

Over the next decade, the mighty baby-boomers, more than 80 million strong, will enter their golden years. With life expectancy on the rise—today’s 65-year-old can expect to live about 19 more years, on average—an aging population will put a huge strain on an already beleaguered federal budget. By 2016, outlays for Social Security will begin to exceed income collected from payroll taxes. Spending on Medicare will continue to soar.

Meanwhile, demand for all the goods and services that older folks need will rise as the population 65 and older explodes, from 40 million today to nearly 55 million in 2020. Demand for caregivers, quality medical care and retirement housing will increase, as will the market for financial products that create a steady stream of income in retirement. For those seniors who are healthy and wealthy, more leisure time will translate into more travel, which will give a boost to cruise lines and hotel chains.

To cash in on the demographic inevitability of an aging society, invest in companies that make products or offer services that appeal to the senior set. At the top of the list are health-care-related stocks, such as Allergan (AGN), which makes Botox, the frown-line smoother, and Ozurdex, the first drug to win regulatory approval for the treatment of macular edema, a major cause of vision loss among diabetics. Another compelling health-care stock is Stryker (SYK), a maker of replacement hips and knees. If you prefer a fund, consider T. Rowe Price Health Sciences (PRHSX). In the leisure-time area, a good choice is Carnival Corp. (CCL), which owns 92 cruise ships. -- Laura Cohn

Emerging markets: Maturing

This will be the decade in which emerging economies lose their inferior status. Developing nations will generate most of the world’s economic growth and account for nearly all additional demand for natural resources. Investors may come to see some emerging markets as safer than countries that are developed but debt-ridden -- such as the U.S.

Most emerging nations weathered the latest financial storm remarkably well. Unlike the U.S., consumer debt levels in developing economies are low, so individuals have the capacity to borrow more to buy homes and consumer products. Francisco Blanch, of Merrill Lynch, estimates that 1.7 billion consumers in the developing world now earn $5,000 to $20,000 per year -- a figure he labels the “sweet spot” for encouraging the purchase of durable goods, such as refrigerators. Practically overnight, China has surpassed the U.S. as the world’s largest market for cars. Prospects are also exciting for India, another country with large, untapped markets.

Investors can share in this expanding prosperity by purchasing a diversified fund that invests in developing markets, such as T. Rowe Price Emerging Markets Stock (PRMSX), or an Asia fund, such as Matthews Pacific Tiger (MAPTX).

Another approach is to invest in U.S. firms that do a thriving business in emerging markets, such as YUM Brands (YUM), owner of KFC and Pizza Hut, and Colgate-Palmolive (CL). One other indirect strategy is to hold a commodities fund, such as Pimco Commodity­RealReturn Strategy (PCRDX), or a natural-resources stock fund, such as T. Rowe Price New Era (PRNEX). -- Andrew Tanzer

Wild cards: Three to watch

Anyone who’s ever played Uno knows that wild cards change the game. The next decade could be transformed in unexpected ways if we experience a global drought or a miraculous breakthrough in technology. To stay one step ahead, tweak your portfolio to anticipate these scenarios:

Dry times ahead. By 2025, more than half of the world’s nations will face freshwater shortages, a figure that’s expected to reach 75% by 2050. You can make your portfolio more “liquid” with Claymore S&P Global Water Index ETF (CGW), an ETF that holds water-related stocks from 15 countries.

A boom in biotech. This industry has produced drugs to treat anemia, asthma and breast cancer, and advances in the coming decade could lead to cures for many other diseases. Instead of trying to pick a winner, play the entire sector with Nasdaq Biotechnology (IBB), an ETF that holds 119 stocks.

Small wonders. Nanotechnology, the science of building machines on an atomic scale, promises ways to make many products lighter, stronger and cheaper. Nanotech has already done that with clothing, cosmetics and even golf clubs, but it could make a real difference in building materials, communications equipment and medicine. The global market for nanotech is projected to grow by 20% annually over the next three years, to $1.6 trillion, says RNCOS, a research firm. PowerShares Lux Nanotech (PXN), an ETF, provides diversified exposure to this highly speculative area. -- Thomas M. Anderson