A Forecast for Low Returns, and Advice for Investors
THE stock market seems to have found its footing lately, touching levels not seen since early 2008.
So I was surprised to hear Jean L. P. Brunel, chief investment officer at GenSpring Family Offices, tell me that he was preparing his clients for a sustained period of low investment returns. And further, he is counseling those clients — families with hundreds of millions of dollars — that they may need to spend less or change their estate plan.
If this is his advice for the wealthy, what does it mean for people with considerably less, who may simply be saving for retirement?
Mr. Brunel argues that the classic link among the return premiums for bonds over cash and stocks over bonds still holds, but they are substantially lower because of the low interest rates set by the Federal Reserve.
Here is how it works. The return on cash is typically the expected rate of inflation plus some real interest rate that is derived from the rate a central bank sets to promote growth. The return on bonds is cash plus some additional amount to account for the duration of the bond. The return on equities is the bond returns plus some premium for the risk associated with stocks.
He noted that cash typically had a return of 4 percent, putting bonds at 6 percent and stocks at 8 to 9 percent. With cash now yielding zero, that has lowered bonds’ return to 2 to 2.5 percent and stocks to 5 percent. The problem, as he sees it, is that too many people are stuck on the old numbers.
“I don’t want you to read into this that we have precise information on real returns,” he said. “I could be wrong. It wouldn’t be the first time. But whichever way you cut it, the environment is radically different.”
Sure, the stock market is off to a nice start this year. But 2011 also started strong — until the tsunami in Japan and the uprisings throughout the Arab world touched off a downward spiral. For the year, the Standard & Poor’s 500-stock index finished flat, unless you include dividends, which put it up 2.1 percent.
We’ll find out if Mr. Brunel’s gloomy take is right. But in the meantime, his forecast of low returns is worth thinking through.
LOWER EXPECTATIONS The consensus among other analysts I spoke with is that most people should plan for single-digit investment returns for a while. That time horizon ran from five to as many as 20 years, in the case of Jim Russell, regional investment director at U.S. Bank Wealth Management.
“If we’re able to generate returns above that, that’s a good problem to have,” he said. “Most clients think the worst is over, but most professional investors think the black swan event is possible.” (A black swan, a term popularized by the economist Nassim Nicholas Taleb, is the unlikely event that too few people plan for.)