Small Futures?

Are we all doomed?

Photo: Alton Thompson. Source: Wikipedia

A recent report by McKinsey and Co. discussed the long-term prospects for the stock and bond markets. Their contention was that after an era of stellar performance, returns are likely to be significantly lower over the next 20 years.

Source: McKinsey & Co

There’s nothing dramatically ground-breaking about these projections. After all, twenty years ago 10-year US Treasury Notes yielded 7%. Now they yield 1.8%. 10-year German bunds yielded 6.5%. Now they yield 0.2%. In the past, strong real economic growth driven by technological innovation and improved global trade was the source for above-average equity returns. Going forward, if economic growth remains sub-par, both equity and bond returns will be a lot lower.

German 10-year government bond yields. Source: Bloomberg

Practically, this means that people retiring in a few years shouldn’t expect a long series of double-digit returns to help them out. If they haven’t started saving, the should begin now. For younger folks, lower market levels during their earlier saving years will help them, in the long run. If you were investing all through the Financial Crisis, your best returns have come from the purchases you made in February and March of 2009, when we wondered if the global economy was headed for a depression.

But this is really a dog-bites-man story. Analysts have been warning us to expect lower returns for a while. Adapting to them means we need to save more and consume less. The highest returns over the long haul, will come from stocks, consistent with financial theory. Bonds are mainly useful as a source of stability, especially if the economy continues to grow slowly.

If returns turn out to be better than this, you’ll end up with a bigger portfolio than you expected. Stay diversified, watch your costs and your taxes, and be careful not to reach for yield. Above all, don’t panic.

Douglas R. Tengdin, CFA

Chief Investment Officer

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