Sputnik... The decline and even reversal of the forces driving exceptional investment returns over the past 30 years means that returns on Western equities and fixed-income investments could be considerably lower in the coming decades, with serious consequences for pension funds and young investors, according to a report from the McKinsey Global Institute. $30 Oil Again? Energy Market Fundamentals Might Suggest Downturn in Prices
A so-called "Golden Age" of investment based on a unique set of circumstances has come to an end after 30 years and will be replaced by lower returns on equities and bonds over the next two decades, according to business and economics research firm McKinsey Global Institute (MGI).
From 1985 to 2014 total returns on equities and bonds in the United States and Western Europe were significantly higher than the long-term average, driven by an extraordinary confluence of favorable economic and business fundamentals, MGI reports.
These include sharp declines in inflation and interest rates from peaks in the late 1970s and 1980s, and strong global economic growth fueled by positive demographics, productivity gains, and rapid growth in China.
"Corporate-profit growth was even stronger, reflecting revenue gains in new markets, declining corporate taxes, and advances in automation and global supply chains that helped rein in costs. Publicly listed North American companies alone increased their posttax margins by 65 percent in this three-decade period," MGI wrote.
The analysts also predicted the returns on investments in the United States and Western Europe over the next two decades and found that in both regions average annual returns for equities could be 1.5 to 4.0 percent lower.
A demonstrator shouts slogans in a megaphone during a rally in central Athens on January 16, 2016 called by Greek main workers' unions to condemn a planned overhaul of Greece's pension system demanded by its international creditors. © AFP 2016/ LOUISA GOULIAMAKI A demonstrator shouts slogans in a megaphone during a rally in central Athens on January 16, 2016 called by Greek main workers' unions to condemn a planned overhaul of Greece's pension system demanded by its international creditors. For fixed-income investments the gap could be even larger, 3 to 5 percentage points, and in some cases even lower than that.
European Union flag © Flickr/ Giampaolo Squarcina Eurozone Economy Accelerates in Q1 Despite Tumbling Into Disinflation A future of low returns could create even larger gaps in pension funds than today, since most pension funds are still assuming relatively high future returns of about 7.5 to 7.7 percent, before adjusting for inflation.
"A two- percentage-point difference in average annual returns over an extended period would mean that a 30-year-old today would have to work seven years longer or almost double her savings to live as well in retirement," MGI wrote.
A sustained period of low returns could also have a broader economic and political impact, if, for instance households were to raise their savings rate substantially to make up for the shortfall in investment returns. This could depress demand, additionally hindering growth and exacerbating the effects of low returns.
Poster Comment:
dvdgrg09 The economic model introduced by Reagan's patrons of government as a way to make money for private companies has succeeded in destroying the US system of production. Twenty trillion dollars of debt later, the beneficiaries of all that debt are revealed as useless wasters. McKinsey appears to be the brains (or the front for the brains) seeking to figure out what to do next. But this pronouncement could be the writing on the wall (or not, who knows what goes on behind the curtain behind the curtain behind etc.). en.wikipedia.org/wiki/McKinsey_%26_Company
Marc Nonnenkamp The global pension system is doomed in its current form due to collapsing human demographics (turning the population pyramid upside down). Plainly put, people need to start getting married sooner and to have much larger traditional families - no different from their ancestors...
.supportin ... All I have to add is that the best way IMO to double one's money is to fold it in half and put it back in one's pocket. So many pension funds have disappeared in a puff of smoke in the USA especially since the 1960's when the pension issuing manufacturers and other employers sold out that it hardly seems sensible to invest at all except in a strong box with a combination lock for under the bed.