The best method of saving for retirement is generally 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 he also laid out the slow demise of long-term investing in a note to clients on Monday titled “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, “the outlook is dire ” for buy-and-hold investors who are trying to generate money for retirement.
“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,” Lapthorne wrote.
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.
- Societe Generale
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 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,” Lapthorne said.
Regardless of these hedges, Lapthorne asserts that a reasonable person can come to only one conclusion.
“But you can’t escape the obvious conclusion,” he said. “Those with large nominal liabilities are going to have to find more money.”