I jokingly wrote the other day that “The best time to start investing was 20 years ago – the second best time is… well, probably another 10 years from now but hey”.
Except… it’s not really a joke. Because it does appear that we’re shifting from the “everything bubble” to the “everything stagnation” – meaning that returns across any asset class you can name are likely to be worse over the next decade than we’ve become used to.
And this is a problem, because a vast gap is opening up between what people expect their portfolios to achieve and what experts believe is likely.
For example, research from the wealth manager Schroders shows that people expect to make an annual return of 11.37% over the next five years. Yet according to the same company’s 10 year forecasts, we can expect returns of:
UK bonds: 0.9%
Global equities: 4.7%
Commodities: 2.4%
Private equity: 5.3%
(They don’t cover property, but you wouldn’t bet on that shooting the lights out over the next few years either would you?)
It’s hard to see how the average investor will get remotely close to 11.37%. Even an outcome that’s positive after factoring in inflation feels aspirational.
So what’s the answer?
It isn’t, in my opinion, to move into riskier assets (NFT resurgence anyone?) in search of higher returns. Instead, I’d focus on two things.
Firstly, don’t kid yourself: make sure you make future projections based on a realistic rate of return. I often see people bandying about statements like “If I just average 8% per year, in 30 years I’ll have…” – and if you’re depending on results like that, you could find yourself painfully short.
And secondly, remember that these are just passive investment returns – which say nothing about what you could make from your own active efforts. If your investments aren’t going to help you out as much in the future as they have in the past, you’ll need to step up with your own active efforts.
It’s lovely when the markets give you a tailwind. But when they don’t, you can still figure out how to earn more, use your expertise to make niche investments that have big potential upside, start a side-business or create an asset that pays you every month…
Yes, clearly you should still invest because sticking with purely cash for the long-term has never been a winning strategy – but a decade from now, to a large extent it’ll be your own efforts and skills that will determine how much further ahead you are.
Talk about gloomy Rob. I thought you were ultra positive.
1. From the first day I started investing people have been saying poor returns going forward. Crash round the corner. End of an era and all the rest of it. Is this really any different?
2. Not only that, but Schroders have been making predictions since the dawn of time. They are never right.
3. Case in point, how an earth can bonds be predicted to pay 0.9% when the ytm’s on all durations of Bond funds are over 4.5%. YTMs explaining 90-95% of the returns you are going to get! You are as near as guaranteed to get it.
All fair points. Broadly though, it has to be highly likely that future returns will be lower than the recent past – given the end of cheap money, and the unhelpful mix of (likely) higher inflation with a lack of productivity growth.
I don’t see it as gloomy though: taking action to put your financial future within your own control rather than crossing your fingers and hoping the markets deliver is about the most positive thing you can do.