We're witnessing 'the death of investment'

Generally, the best method of saving for retirement is thought to be a diversified portfolio consisting of both stocks and bonds held for a long period of time. This decreases risk while allowing for a long-term accumulation of wealth.

Andrew Lapthorne, head of quantitative analysis at Societe Generale, thinks that this model is dying.

The strategist not only pointed out some worrying trends in current global markets, but also laid out the slow demise of long-term investing in a note to clients on Monday entitled “The death of investment.”

In the note, Lapthorne tracks the 20-year return for a portfolio consisting of 50% global stocks pegged to the MSCI World index, 40% government bonds, 5% cash, and 5% corporate bonds with an initial investment of $100,000. In his opinion, for buy-and-hold investors who are trying to generate money for retirement “the outlook is dire.”

“If you invested today for 20 years the after cost excess return might be $21,800 (today’s yield on a balanced portfolio is just 199 [basis points] minus 100 [basis points]) versus $60,000 if you invested 10 years ago — and a $150,000 30 years ago,” wrote Lapthrone.

Basically, the amount of money that investors can expect to make from their nest egg has been deteriorating over the past 30 years, and the trend doesn’t look to improve. Lapthorne highlighted this in a chart showing the returns over time, and it’s moving in an ugly direction.

This is a big deal for anyone who has a hope of retiring. Lower nominal returns means that people have to work longer or invest in riskier assets to generate the amount of cash needed to live through retirement. The lack of returns has even been termed a “retirement crisis.”

As there always are, Lapthorne included a few reasons why this may not be as bad as it looks.

“Of course inflation rates are much lower today than they were 30 years ago and trading and management costs are coming down,” said Lapthorne.

Both of these are important, as inflation erodes the value of returns over time and, as we’ve noted before, fees can have a serious impact on return so declining fees shouldn’t be ignored.

Regardless of these hedges, Lapthorne asserts that there is only one conclusion any reasonable person can come to.

“But you can’t escape the obvious conclusion: those with large nominal liabilities are going to have to find more money.”

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