Hard Times?

Are we living in times of low returns or is this just noise? Have we fallen on hard times? Find out Noel’s opinion here…

A few years ago I went to a talk in Birmingham by the co-founder of Seven Investment Management, Justin Urquhart Stewart. He wore the trademark red braces which help us to identify advocates of active management and by and large, although I disagreed with many things he said, he was a good speaker.  

One of the things I took issue with and questioned him on, was his assertion that we now live in “a low return environment.” Although he looks older than me, I might have spent more time in the investment industry than he has, and I have seen a number of boom and bust cycles come and go, including the savage recessions of the early 80s and early 90s. After each of these events, the financial press trot out the same old canard, that we live in times of low returns, although I have never seen any evidence of it and, indeed, no evidence exists.  

To the contrary, there is plenty of evidence that following a market downturn, expected returns from stock markets are higher, simply because the market has to perform better in order to achieve its  long-term average return of 6-7% per annum above inflation. I have attached a graph of the performance of various markets, cash and the retail price index, since the beginning of 2009, up to the end of 2016. You will note from the graph that had you invested in the S&P 500 for that period your money would have grown almost 3 ½ times, a compound annual return of 16.68%; the World Index grew by 13.66% per annum, the FTSE All Share by 11.14% per annum and even Europe achieved 8.37% per annum. Inflation over the period as represented by the retail price index was 2.88% per annum and low interest rates ensured that cash couldn’t even beat that with a return of 1.95% per annum.  

Growth of Wealth 2009 to 2016

So, if you’re in cash, then you are in a low return environment, but that is always the case as it rarely beats inflation. In any of the major markets you have comfortably beaten inflation and, in three of the four above, you are achieving double-digit annualised returns. The same has been true of every period where the press (mindlessly repeating what they are told, of course) predict low returns for evermore. Like most predictions made by human beings, they are almost invariably wrong.


You might wonder why sensible people say things like this and I can only speculate. They can, of course, point to cash returns which for the last 10 years have been both nominally and in real terms, very low; the cynic in me thinks that this might make it easier for the banks to push their expensive structured products at their unsuspecting customers. Perhaps, also, predicting low returns makes life easier for those who are achieving low returns, such as active fund managers.

This article is distributed for educational purposes and should not be considered advice or an offer of any product for sale.

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