The first inconvenient truth is this: high interest rates were a historic anomaly – they will not return soon.
More unpalatable facts
Further truths about the future of the global economy support our view that the returns investors expect will be hard to achieve. The global labour force is declining, thanks to lower fertility rates, and this will contribute to slowing growth. Productivity growth is also expected to slow, even in emerging markets. The era of “catch up” growth as they closed the gap with the developed world is ending.
Then there’s the ageing population, a much-discussed problem that will put pressure on government finances worldwide and compound the effects of slower population growth.
Across the world, the picture for growth is gloomy. Every economically important region is expected to experience lower GDP growth over the next ten years than the average since 1996. Emerging markets will increase their share of global GDP, with China becoming particularly critical to the world economy. But even the Chinese tiger faces threats. Its policymakers will have to deal with its own demographic changes for its economy to flourish.
Finally, inflation, which could drive investment returns, is expected to be muted by decreased demand and the deflationary impact of new technology.
The net result of all of this will be a low return, low interest rate environment that looks very different from the 10.7% returns over-exuberant investors expect.
Solutions for a half-empty glass
Why am I telling you your glass is half empty? Because having unrealistic expectations does nobody any favours, especially now that so many of us are being asked to put our own financial plans in place to fund our old age.
Accepting that we have entered a low and slow income environment is the first step. Not only do you have something to plan for, you also have choices about how to tackle the gap between those expected high returns and the probable lower reality.
One obvious step that can be taken is to invest more, and to invest sooner. The miracle of compounding will then ensure the possibility of greater returns over the long run. If you can put more money away now, it will make a big difference.
Another solution is to step up the risk you take. Higher risk equities may produce higher returns, but you must be comfortable with your level of risk and understand the potential volatility this may cause along the way.
And in a low-income environment, skilled active managers can really make a difference. Diversified funds, picked by those who understand the global economic realities we face, can ensure that your money works as hard as possible for you while it is invested. Pick a fund that works for you. Then your glass really could be (more than) half full.
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