Brendan Greenwood, CFP, CIM, B.Comm | January 29, 2024
Returns of the golden age (1981-2021) will be more challenging achieve
The past four decades up to 2021 has been referred by many as the golden age for investors. Global stock and bond markets benefited from several tailwinds. Globalization was accelerating economic output through increasing trade, foreign direct investment, and technology transfer.
Dormant inflation and a long decline in interest rates enabled individuals, business, and government to save and spend more. Increasing amounts of money flowed into stocks and real estate pushing asset prices up. This created a wealth effect leading consumers to feel richer and spend even more further fueling acceleration in the growth of asset prices.
The following chart shows the annualized real return for global stocks and bonds during the golden age compared with the 80-year period preceding 1981. The US stock market provided even higher returns. The annualized real returns of the Golden Age were much more impressive than the preceding eight decades.
Forces fueling the accelerated growth of the golden age now in reverse
Many of the forces that contributed to the accelerated economic growth of the golden age have started to reverse. The world is beginning to experience deglobalization as geo-political tensions continue to rise. America, China, and Europe are trading less with their geo-political rivals.
Inflation although down from the highs of last year, will likely remain at more elevated levels compared to the past. And interest rates are likely to remain higher for longer.
The equity risk premium an investor receives for buying stocks has shrunk to its lowest level in decades
The economic climate we find ourselves in today has driven the equity risk premium investors are paid to invest in the stock market to all time lows not seen in over 20 years. The equity risk premium represents the excess return earned by an investor when they invest in the stock market over a risk-free asset, like a government bond or treasury bill. The chart shows the current equity risk premium at near zero.
Will there be another lost decade?
The current economic climate could mean slower growth and more volatility for stock markets. Lower expected stock market returns may lead some investors to take on riskier behaviour in search of return fueling further stock market volatility.
We may see a side-ways stock market. The stock market has seen lost decades. The S&P 500, a market-capitalization weighted index of 500 leading publicly traded companies in the U.S. has had 10-year plus periods that have generated no return. Notably, there was the period following the dot-com bubble from 2000 to 2012 where the S&P 500 went nowhere. Also, in the 60s and 70 there was a 12-year period of no growth (reference chart below).
The economic climate has changed; is your investment portfolio setup for growth?
To achieve consistent compound growth in your portfolio going forward, consider diversifying your investments with an asset mix that is less correlated to the stock market. These assets are often referred to as alternative assets that have the potential to improve compound returns. They may include funds that use options, hedge funds, commodities, different types of debt or even traditional bonds. Alternative investments can lower the volatility of your overall portfolio and help provide more predictable return year to year. The economic climate has changed from the golden years. Is your investment portfolio setup to generate growth in this new economic environment so you don’t fall behind?
Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on improving the lives of his clients and their families through holistic planning. He specializes in tax advantaged personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, business owners, retirees and their families.
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Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
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