May 052016
 

The Pessimism in the Markets

Corporate profits have been disappointing lately. Apple (AAPL) recently said its revenue fell for the first time in 13 years due to a decline in iPhone sales compared to the same time last year. Apple shares are worth 26% less now than a year ago. Investors are warned the decline could continue. 🙁 Other publicly traded companies are experiencing similar challenges. Top line growth is slowing down, and its becoming harder to maintain profitability levels.

A recent article on Bloomberg.com suggests that future investment returns for millennials will be lower than prior years. It cites a study by consulting firm, McKinsey & Co, which proposes that “the forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing.” So maybe it’s time for investors to lower our expectations.

Lower Investment Returns for Millennials

The last 30 years was actually a bit of an anomaly because on average we’ve had a couple of percentage points better annual returns when compared to the past 100 years in general. Falling inflation rate has helped drive real returns, and bond prices increased substantially as interest rates fell for the last couple of decades. 🙂 But going forward we may face secular stagnation and a lack of economic growth due to an older population. Let’s take a look at the study’s findings, and future return estimates.

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Regarding U.S. equities for the time being, it appears growth in the following 20 years will be 1.4% to 3.9% lower than in the past 30 years. The director of the study, Richard Dobbs, warns that the people who will lose out the most are the millennials. Oh no. That’s me! It appears we’ll have to either work longer or find other ways to put more money in our retirement accounts. The alternative is to retire poorer and live off government cheese, which is actually a luxury in Canada considering the expensive tariffs we have on dairy products, haha. 😀

Preparing for the Next 20 Years

So here are a few of things I’m doing to deal with all this information. They may not work for you, but I will share anyway.

First, the most important thing is to lower the cost of investing. This is even more crucial if market returns will underperform in the future. Using the numbers from the graph above, the average return on U.S. equities over the last 30 years was 7.9%. So if our management fee and other combined costs were 1%, then our actual return would be 6.9% after fees. The 1% fee would effectively eat away 13% of our actual market return.

But the “slow-growth scenario” claims that over the next 20 year period the annual return of U.S. equities will be only 4%. If we still pay the same 1% portfolio fee as before, then this cost will eat away 25% of our future annual return, nearly twice as high in percentage proportion to a 7.9% market return. Bummer. 🙁

So how can we lower pesky fees and reduce the overall cost of investing? It’s simple. 🙂

How do we reduce the long term costs of plumbing? We learn some basic DIY plumbing skills. How do we reduce the cost of food? We learn to cook and meal plan. How do we reduce the cost of car repairs? We learn some basic knowledge about car maintenance like how to check the tire pressure, change the oil and air filter, etc. We can reduce the cost of any aspect of our lives by simply educating ourselves on the subject. 😉

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So if we want to lower our investment fees, we just have to better understand how to invest and manage our own money. With the advent of ETFs and robo-advisors, I hope everyone reading this blog is paying less than 1% management fee on their portfolio. If you’re interested to learn more about low cost wealth management services, check out the thorough review about Wealthfront, that my friend Jacob wrote on his blog.

And the second thing I want to mention is to take any articles you read about future market returns with a huge slab of Himalayan salt. Thanks to new technology we have industries now that weren’t around even 10 years ago. The iPhone accounts for nearly two-thirds of Apple’s total revenue today, making it the largest publicly traded company in the world. But 10 years ago the iPhone didn’t even exist yet, and Apple was worth just a fraction of it’s value today. It would have been nearly impossible to predict in 2006 that in just 10 years a consumer electronics company would become more profitable than any big oil or banking giant. Yet that’s exactly what happened. 😀

The truth is nobody knows what the future will bring. Some of you may remember this issue of Business Week magazine published in 1979, claiming how equities are doomed.

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Imagine if someone read that magazine, got spooked, and sold all their stocks to buy safe investments instead like GICs or term deposits. Well over the following 20 years since this issue was published, the S&P 500 stock index went from 100 points to 1300 points. That’s a 14% annual rate of return from 1979 to 1999, and was one of the longest bull markets in history. So just because some “experts” make headlines with a compelling prognostication, it doesn’t necessarily mean it will happen.

And finally, divest a portion of your portfolio away from stocks and bonds. The world of investing is much larger than just the conventional asset classes. I wrote about some alternative assets in my previous post from earlier this week. 🙂

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Random Useless Fact:

Google employees must be hot commodities in the dating market. 😛

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16 Comments on "Are Future Investment Returns for Millennials in Jeopardy?"

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May
Guest

I’m not an economist but I think that some of the recent growth in company earnings has been at the expense of the workers. Yes – companies need to continually work on become leaner and meaner and squeeze margins but I think at lot of it has been in the payroll department – contract workers, offshoring, pay freezes etc. There is only so far they can cut before they jeopardize the health of the company and it is not sustainable. Somethings gotta give.

Dividend Beginner
Guest

Hey F35,

This has been pretty disheartening as I see it all around currently. Personally I think we will be able to figure things out and continue growing over the next 20 years. It’ll take a while to find our footing but no one can predict what will happen even in the next 5 years so I’m optimistic.

Fernando
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Fernando

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BeSmartRich
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I am eyeing on apple now. Bidding @$98. Hopefully bad news gets worse! 🙂

Dividendsdownunder
Guest

Interesting thoughts to think about. Overall markets may not do so well, but there are certain ones out there that will continue to grow. Particularly ones aimed at an aging population, so watch out for that 🙂

Tristan

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Anon
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Anon
“Well over the following 20 years since this issue was published, the S&P 500 stock index went from 100 points to 1300 points. That’s a 14% annual rate of return from 1979 to 1999, and was one of the longest bull markets in history.” As you mentioned at the start, this due largely in part by falling interest rates and increased debt. It’s very easy to expand when you can borrow more and more but pay less and less (see your own portfolio). The next 30 years will see a more realistic growth of wealth. “And finally, divest a portion of your portfolio away from stocks and bonds. The world of investing is much larger than just the conventional asset classes.” All of which are unfamiliar or inaccessible to the average investor. Apart from stocks and bonds, there’s really only real estate and private equity (Exempt Market in Canada), which is just more stock under a different name; so basically just stocks, bonds, and RE. All of the so-called “alternative” investments can be bought via public stocks/funds. An Exempt Market company (like the one you deal with) might have an average total return on their investment shelf of 8% per… Read more »
Our Next Life
Guest

I think it’s useful to read prognostications like this just to remind us all not to be too aggressive with our assumptions. I’d love for these predictions to be dead wrong, and for the U.S. to have another 100 years of amazing growth… but that scenario is unlikely, too. To us, there’s no going wrong with building your FIRE projections around low rates of return. Best case, you get more to spend than you anticipated, but worst case, you’re not out of options in a period of extended stagflation (just ask Japan) or flat returns. If a scenario doesn’t work with 3% returns, we don’t bank on it.

Mario
Guest

Same. I expect it to be flat for a couple months. The silver lining I see with a little tougher times in the market is that folks who only started investing after 2009 finally get to see that the market does something other than constantly go up.

Sigh… Anyway, glad I’m investing for the long game

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