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Posted by on Nov 2, 2016 in ETF Strategist, Investment Perspective, Market Insight

Calls For Poor Returns Or A Call To Action?

Calls For Poor Returns Or A Call To Action?

By Roger Nusbaum, AdvisorShares ETF Strategist

Bloomberg posted an article titled The Next 10 Years Will Be Ugly For Your 401(k) with the secondary headline (at this was referred to as the callout) we’re about to pay the price for all the good times.

The article is based around work from Research Affiliates (RAFI) and includes the following;

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.

Fortunately, we’ve had ugly ten years runs before, as recently as the ten-year period ending December 31st 2009 when Google Finance says the S&P 500 fell about 20% on a price basis. Using simple math, that’s 2% per year in the period. RAFI is not expecting negative returns, just low returns.

Even if RAFI is right, the returns won’t be linear. During the 2000’s there were some very good years. In 2003 the S&P 500 was up about 25%, another 10% in 2004, 2006 was also double digits and of course 2009 was up a ton as well. There were some flat years and a couple of terrible years.

Whether or not RAFI is correct, the next ten years will be a mix of some number of great years, a couple of flat years and a couple of terrible years. Maybe the decade will have three terrible years and the overall result will be poor but if there are only two terrible years then things could be pretty good. That one extra terrible year would be the difference maker between good and meh/terrible.

Both 2003 and 2009 were huge up years. There aren’t too many of those in an investing lifetime (two or three a decade) and so they can’t afford to be missed. By the same token, another form of difference maker can be a defensive strategy (like the 200-day moving average) to hopefully avoid the full brunt of one of those terrible years. If an investor is lucky enough to only go down 10% in a down 25% world, then he is potentially added 150 basis points per year over the ten-year period (depending on how he re-equitizes).

This involves some sort of active or tactical hand and so there can be no guarantees but there are plenty of valid methods for this that should give a reasonable expectation for success.

The other way to mitigate an ugly decade is to increase savings rates. That is easier said than done but as a subset of the American population, people who read stock market blogs probably have a better chance of increasing their savings rate or otherwise already be saving at a very high rate. It appears the HSA isn’t going away (this was in some doubt for a while). This is a great new savings outlet for anyone not already using one.

The contribution limit for a family is $6750, so after ten ugly years the HSA would have $67,500 plus a little bit of growth. How much do you have now, how much might you have in ten years, what percentage would a $70,000 or $80,000 HSA be of how much you might have in ten years? This amounts to a little over $500 per month. Will you get a raise this year? Will it be $500 a month? If so, there’s your HSA contribution.

Calls for poor returns should be taken as a call to some sort of action. I would say that action should be more of an active hand in portfolio management as well as an increased savings rate. You might have other ideas but sitting back and just letting poor returns happen to you is not the answer.