How to Invest for the Next 40 Years
Happy New Year to all our readers. May 2024 have healthy things in store for you and your loved ones.
I only did one blog a month in 2023, but for good reason. We are busier than ever! With generative AI, I could have churned out much more schlock, but I will not add to the growing AI-generated “thinformation glut,” in which every search presents hundreds of paragraphs of partially accurate material presented confidently. Like an earnest summer intern, generative AI is frequently wrong but always confident.
This blog is written by an actual human who cites sources and edits, something readers like you will continue to appreciate. But you may have to wait a little longer for the posts. – David
Clients don’t come to Lifetime Financial looking for unrealistic, market-beating returns. We offer sophisticated investing that meets practical needs, like better management of your emergency fund and how to avoid target date fund mistakes. Our portfolios are crafted around carefully selected, globally diversified, low-cost index funds.
We do this because markets are, in the financial jargon, ”efficient” enough that investors can neither effectively time them, nor reliably pick the highest returning stocks. Efficient doesn’t mean predictable. If you study market history and watch it move daily for over three decades, you’ll be cured of the desire to predict returns.
In 2023, the S&P 500 soared to a 24% increase and nearly a new all-time high, defying all pundit predictions. Markets have a way of surprising us because they reflect crowd-sourced human emotion as much as rational investing. (This is a central hypothesis of Behavioral Financial Economics.)
For long-term investors planning for retirement it doesn’t matter anyway. Short-term market movements are noise to ignore. That’s why I don’t like to provide frequent blog market updates, preferring instead to save them for the once-a-decade dire bear markets for which some kind reassurance is called. My last was during the 2022 bear market.
What happens between now and your retirement is mostly a psychological risk, at least until you are 15 years out. At that point, you should employ a capital preservation strategy and start putting aside increasing portions of money into bonds until you approach your chosen date.
What we (at least those under age 65) should really be interested in are long-term market expectations, usually considered 20 or more years. This past week The Economist published an article announcing the end of the Golden Age of investing (1983-2023) during which stock and bond market returns were astronomical compared to any other time in recorded history. A dollar invested in US stocks in 1983 became $21 dollars 40 years later in 2023 after deducting inflation i.e., in real terms. The same dollar in bonds was worth $12 in 2023.
The Economist rightly points out that Golden Age stock and bond returns are more than 3x higher than historical global returns. If markets merely return to their long-run (100+ year) averages for the next 40 years (2024-2064) the total returns will be three times less! (See graph below.)
Neither the article’s writers, nor I are arguing that we are headed for a new great depression or presaging apocalyptic events. This is just what happens if we have a reversion to the long-term average. The economic message is that GenX, Millennial, and GenZ retirees will likely need to save more money to have the same amount as those that accumulated a great deal of wealth in this incredible run (mostly boomers and earlier generations).
“But David, you just said the SP 500 is at an all-time high!” It’s possible the Golden Age isn’t quite done yet. Or maybe, as WSJ senior market columnist, James Mackintosh, pointed out last month, 2023 looks like the end of a bull market, because the gains are largely contained in a few huge companies (Apple, Microsoft, Amazon, etc.).
The causes of the Golden Age outperformance are numerous: American hegemony, economic globalization, low inflation, and a digital information revolution. All helped but what really caused the high returns was the economic boost from falling Federal Reserve interest rates. The Fed went from the highs (20%) of the late 1970s stagflation to the low (0.7%) of April 2021. Lowering interest rates has a boosting effect on stock and bond prices.
Yes, rates have gone back up and generally it’s a good thing to have rates at least in the mid-single digits. As of January 15, 2024, we are now at 5.3%--still a long way from 19.0% in July 1981.
This is not an instruction to sell stocks now. Stocks over the next 40 years will still be better than other investments and they will still be the largest source of invested wealth for the mass affluent, second only to primary home real estate equity. Comfortable, long retirement is still very possible, but you might have to save more than you thought if you were using Golden Age estimates.
In fact, you are going to need more stocks in the next 40 years by our sobering estimate, something the article says most GenZ and Millenials are missing. Get your portfolio set for the next 40 years, give us a call if you want help.
