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.

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Nov 292011
 

Did you see the markets today? Normally when we, average citizens, talk about “the markets” we mean the stock market of course. Not long ago I thought the stock market was where all the rich people hung out, and where most of the money went to create jobs, companies, and the economy.

But I was wrong…

The stock market IS big, no doubt, worth about $60 Trillion globally. But that’s a nothing sandwich when compared to the world financial markets. The Financial Markets as a whole is made up of many individual markets, (stocks, bonds, commodities, etc) Most investments, and financial resources in the world, are actually not in stocks.

The bond market, for example, is worth almost $100 Trillion. It’s so big that it influences the stock market, (like last week when dire European bonds triggered a stock market tumble that lasted an entire week.) Understand the bond market, and the stock market will make more sense. But if you really want to play with the big boys, look towards the forex market. $4 Trillion worth of money switch hands on a daily bases, much more than the daily volumes of stocks/bonds. And we haven’t even talked about the derivatives market which globally is valued at $615 Trillion.

We mostly talk about the stock market because it’s the easiest market (out of all the financial markets) to understand, plus anyone with pocket change can buy stocks. But all the smart money in the world, and all the institutional investors and hedge fund managers, worry about the larger, more influential markets. The stock market will never bankrupt or collapse a nation. But sovereign bonds, derivatives, and currency manipulation, can cripple the entire world’s economy if people aren’t careful.

Stocks are certainly one way to grow a portfolio, but it is far from the only place we can invest. A true investor will find a way to gain access to, and utilize all the investment opportunities offered by the financial markets, in its entirety. I will give an update once I have figured out how to do this 😀