Uh-Oh -- Investors Should Lower Their Expectations

When it comes to investing, it looks like the party is over. 

A study by McKinsey Global Institute finds that investors should expect diminished returns over the next two decades, as the golden era of investing ends.

MGI says returns on both equities and fixed-income investments in the U.S. and Europe over the next 20 years could be considerably lower than they have been in the past.

"When we put the two together in a typical portfolio, it will yield somewhere like 2% to 4% less than the last 30 years," says Richard Dobbs, a director at MGI and one of the study's authors.

Returns were exceptional over the last three decades as inflation rates fell, economies grew and corporate profits skyrocketed.

But that's now changing, and a slower-growth environment means portfolios grow more slowly too.

MGI projects total returns for U.S. equities could average 4% to 5%, and returns on fixed-income investments could be just 0% to 1%.

"The difference in returns could have a profound effect on all investors and by extension on society more generally," Dobbs says.

For instance, saving for retirement just got a lot harder.

"The 30-year-old today will probably have to save over twice as much.

Or they'll have to work another seven years," explains Dobbs. He added that the lower return on investment will also lead to bigger deficits in public pensions across the U.S.

"If we play out the lower returns, those deficits go from at $1 trillion, to $2 trillion or $3 trillion. So the public sector pension problem becomes much harder," says Dobbs.

University endowments would also take a hit, he says.

The study also suggests that falling returns will be a drag on consumption growth.

Source: The Street

Posted by: The Trust Advisor



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