Politicians, bureaucrats and global organisations set a lofty and important goal for humanity back in the eighties – to halve severe poverty.
Not only has this been achieved, it was accomplished in half the time originally set, has improved the lives of billions and helped humanity advance in many ways.
Investors, in key areas, have reaped large benefit from the creation of new markets and consumers, but other things resulted too.
Unintended consequences
One side effect of removing poverty from a household is the natural decline in birth rates per woman.
Fewer children born, 1.4 billion less in fact, resulted from the mid-nineties forwards, and thanks to better healthcare people are living longer as well – not just in developed nations but also developing ones everywhere.
That’s 1.4 billion fewer people entering the workforce, right around the time of the GFC.
1.4 billion fewer consumers and tax payers at the same time of a massive increase in retirees.
This trend is global and, perhaps surprisingly, crosses race and religion. No one saw it happen as it moves at a quiet but now unstoppable pace, masked by the hubris of the GFC. Productivity in all developed nations has also been falling since the beginning of the century.
The Great Down-Shift
GDP growth = worker population growth + productivity growth, both of which are in strategic decline – workforce growth unstoppably so.
Economies aren’t responding to massive fiscal and monetary policy moves as they’re aimed at fixing the wrong cause and are unable to react, and growth has therefore structurally downshifted.
Lower growth results in lower returns, and this lowering means that returns won’t bounce back to post WWII long-term averages, as corporate earnings must eventually adjust.
Advisers, researchers and investors alike have grown up with a base expectation about average growth and thus investment returns, baking in far higher numbers into their future plans and expectations.
Propping things up short-term is an enormous amount of debt and cash.
Volatility is rising and will worsen
Most people are unaware that price movements are as severe and as frequent as they are.
The leverage, uncertainty and fragility of markets coupled with political action and backlash to the undiagnosed Down-Shift will ensure more frequent and deeper losses are to come.
- Over the last 50 years, the S&P500 fell on eight occasions of more than 20 per cent for periods of 3+ months.
- The average decline being 35 per cent each time.
- This equates to once every six years on average.
Back to retirees
Retirees are threatened by a combination of factors resulting from the Great Down Shift. Their future will be less secure and comfortable unless advisers and retires have courage and an open mind to revisit their base assumptions about the world and the strategies built upon them.
7 ways retirees’ long term futures are at risk today
- Equity market averages will lower with only certain sectors performing well into the future. This will hit index investing retirees hard. (And many in active funds that hug Index weightings).
- 4 per cent rule no longer valid: An industry rule of thumb utilises this 4 per cent rule on calculating drawdowns from retirement savings. This downshift means this rule is too high.
- Above average growth will emanate from places that traditional bias in asset allocations will limit exposure to and thus struggle to benefit from.
- Balanced portfolio theory is failing to combat down-shifting returns. Already, quantitative data proves bonds and equities are positively correlated much higher than thought previously.
- The flow-on of this has been a ‘search for yield’ driving up prices and without risk being properly priced.
- Licensees appear not to have enacted strong strategies (from lessons learnt in the GFC on retirees) to properly combat the inevitable and far reaching increase in risk and volatility as a result of the Down-Shift.
- Falls of 20 per cent and more over periods longer than 3 months can drastically shorten the life of retiree income streams.
Volatility is here to stay and will worsen. Insync modelling shows a difference of many years of additional retirement income that can be produced simply by forgoing some out-performance in returns for simple downside protection across an equity portfolio.
Insync set about researching this unstoppable global phenomenon based on realism and fact, crossing several academic disciplines and evaluated as an interdependent group.
It’s rare that demographics are deeply on the radar screens of investors or researchers, but our findings are hard to refute.
Their impact is already being felt and among the havoc that will come there will be opportunities investors can exploit, and potholes to avoid.
A fresh, open-minded approach with no ‘sacred cows’ will be required if investors are to successfully navigate both.
Monik Kotecha is the chief investment officer of Insync Fund Managers, and wrote this piece in conjunction with investment specialist Grant Pearson.
