Lower Expectations

Good Morning,


History doesn’t repeat itself, but it does rhyme. This weekend MarketWatch produced an article based on an interview with Jeremy Grantham (co-founder of GMO) by CNBC. Unfortunately, he did not leave readers(or viewers) with a rosy picture in this article but he dropped some gems worth noting:

1. Future return expectations for the next 20 years will be around 2-3%, instead of the 6%+ in the past couple of decades

2. Based on his estimations the current market is overvalued

3. He doesn’t see the developed market's returns rising much more this year due to Central Bank influence

This article was short, but digging deeper into the first point about expected returns is constantly overlooked. A lower rate of return requires a higher savings rate in order to have a larger nest egg at retirement. Most investment professionals use the historical 6%, but based on our current GDP growth rates and current bond yields seems 3% more appropriate. His notion of the market being overvalued can be considered legitimate based on his valuation methodology, but the one thing his method doesn’t account for is changes in the economy. 


Revisiting the first sentence of this blog along with the previous paragraph is a reminder that nothing stays the same. Being vigilant of the differences between then and now allows for better decision-making opportunities. Return expectations change along with outlooks on the markets, hence our strategies must stay dynamic amongst every changing markets.


https://www.marketwatch.com/story/investor-credited-with-calling-the-2008-crisis-says-the-next-20-years-in-the-stock-market-will-break-a-lot-of-hearts-2019-03-07

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