Over the last few weeks I have read several articles suggesting investment returns will be lower in the future. One article says there is a Wall St consensus that people should not make their plans expecting the high returns of the past to continue.
With lower returns the argument runs, savers will see their hopes for a good retirement dashed. They will have to be more cautious as their savings will not grow as fast and they will not get good returns when they are in retirement.
Well, maybe – but maybe not. People planning for retirement should remember that the saving rate usually beats the investment rate. This means the more important thing for savers is the amount they save rather than the returns they get on investment.
When you do the numbers, people who put away more will usually get to a better place than those who save less but get a better rate of return. Sure, you are best to have a both a high savings rate and a high investment return but for many, a small increase in savings will make up for any lower investment returns.
Commentators predicting lower returns may be barking up the wrong tree – they should be studying whether future retirees can save more, as well as likely future investment returns.
In any case, will investment returns really be lower? We will know the answer to that in a decade or two, but at the very least the idea of lower returns needs challenged.
It does seem to me that investment returns from bonds are likely to be lower than they have been. Interest rates on bonds are very low: the capital gains that bond investors have enjoyed from falling interest rates over the last 30 years are unlikely to continue.
But low interest rates are only half (maybe less) of the argument. The other side is that shares could give higher returns, making up for the low returns from bonds and term deposits. Most smart long-term savers have a bigger amount of shares in their portfolios and a smaller amount in bonds
Although I have some concerns about share markets at the moment, I am quite optimistic in the longer term. Invention and innovation are likely to continue, with more and better products and services being developed and sold.
Remember that some of the companies that have created huge wealth barely existed 20 years ago (Facebook, Tesla, Google etc.) The next lot of companies that will provide big returns for investors are still in development. The new lot of mega companies may be unknown – but we can be confident there will be new industries and new companies giving high returns to investors.
In the future, share investment should be at least as good as ever, with new companies offering products we can barely imagine today. Long-term savers should put as much aside as possible and ensure a decent part of their funds is in shares.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.