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When Planning for Your Investment Future, Don’t Bet On the Past


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by  Darren Reinig

It was Shakespeare who first said “what’s past is prologue”—the idea that history is a good indicator of what to expect in the future. For investors, it’s advice they’ve heard for years. Advisors and brokers, confident in a reliable market, have shown their clients historical data and told them not to worry, the rates of return on stocks and bonds are as predictable as the rising sun. The problem is, these days some important indicators are pointing to a future that is anything but.

To weather the current low-yield environment and account for a future that may not be as friendly as expected, investors need to rethink their approach to implementation. Those who don’t are liable to miss their financial objectives, which can lead to poor decision-making and increased risk.

So, why does the future of investment look so gloomy? Two important reasons: growth assumptions are down, while health and longevity are up.

Growth Assumptions Are Down

Economic growth assumptions are considerably lower than they have been in the past. The downturn is driven by a fundamental shift in demographics. The workforce isn’t growing as much as it used to, and neither is productivity. These two inputs are critical to economic expansion, and their decline portends a potentially slower rate of long term economic growth.

Flagging growth assumptions are reflected in low real bond yields. Whereas historically, investors could expect to make 3 to 4 percent return over inflation in bonds, these days they’re lucky to match it. That’s a huge disparity between past and future returns.

As overall bond yields have gone down, market valuations, particularly in the U.S., have gone up. Academics who’ve studied the earnings yield—an accurate predictor of what you’re likely to make over the next 20 years, adjusted for inflation—have found it to be  below its long-term average as markets have recovered from the financial crisis.

price earnings chart

Data Sources: Robert Schiller and Yale University and Delphi Private Advisors. Past Performance is no guarantee of future results. Indexes are not available for direct purchase.

When valuations are lower (and thus equities are cheaper relative to history), investors tend to make more money looking forward. When they’re higher, investors are likely to make less. Right now, the market is pricing in lower future returns. Current figures predict an equity return over inflation over the next decade significantly lower than past periods.

fixed income chart

Data Sources: St. Louis Federal Reserve, Barclays Capital, and Delphi Private Advisors. Through 4/30/2017. Past performance is no guarantee of future results. Indexes are not available for direct purchase. Real Return is the difference between the return of the index and inflation. The market implied rate of inflation is calculated by subtracting the current yield of 10 year Treasuries from the yield of 10 year TIPS.

And it isn’t just bonds whose yields have taken a hit. Other asset classes, including real estate, have seen their expected yields over inflation fall as well.

Health & Longevity Are Up

It would be bad enough if the drop in future returns was affecting an investor population whose life expectancy was the same as it was 30 years ago. But health and longevity continue to rise, especially among Americans in the middle to upper classes. According to a report published by several leading economists, “Average U.S. life expectancy was 67 years for males and 73 years for females five decades ago; the averages are now 76 and 81, respectively.”

The upshot is that today’s investors will need more money to last longer, precisely when it’s getting harder to make it. Middle-aged investors across the country would be wise to reassess their portfolios, to see if they’re properly positioned to make their objectives, based on today’s shifting expectations. The problem is most advisors aren’t talking about it.

A Recipe for Risk

Falling growth assumptions combined with rising life expectancy is a recipe for risk. Panic sets in when investors start to realize that their portfolios, based on plans rooted in the past, will no longer meet their expectations. The anxiety that accompanies this realization often leads to poor decision-making.

Faced with the possibility of missing their financial objectives, many investors will chase returns by looking for the hot stock or manager. Their investments get riskier, which leads to more downside and higher volatility. Lower returns result in increased frustrations, and the vicious cycle of risky decisions continues. All because of their portfolio was designed and built based on historical data that failed to account for certain critical realities about the current market.

Implementation is Critical

As returns fall and longevity rises, the question every investor should ask is, “How do I increase the odds of meeting my long term objectives?” The answer is careful, methodical implementation. Along with a healthy dose of patience, investors today must have proper implementation if they hope to meet their financial objectives. That means finding a first-rate team who understands the long-term market implications of current financial indicators.

In the past, the typical portfolio could withstand a bit of bad decision-making. Solid returns on asset classes across the board meant that the occasional hiccup wouldn’t sink an investor entirely. Looking forward, however, it’s a different world. Not only are return expectations lower in an expensive market, but investors are living longer and doing more later in life. Your portfolio is no longer just a commodity—what happens to it matters, and it’s important to understand why. Highly strategic, thoughtful implementation can mean the difference between a portfolio that misses its financial objectives and one that is there to support you when it comes time to live out your retirement dreams.



Speak with an advisor

There’s no better time than now to protect the wealth you’ve built. Contact us today to speak with an advisor.