Emerging Economic Trends and Major Shifts
There are major economic and investment industry shifts evolving. Even if they were possible to ignore, burying your head in the sand isn’t going to help. Unless individuals take equally significant steps to counterbalance these trends and over-prepare for their financial futures they will likely find that they are far under-prepared.
Perhaps most significantly the nation’s top financial minds and investment houses have been warning that we are entering a new era of low returns. This is the sentiment which has been echoed by many including PIMCO and Morgan Stanley. The Financial Times says low returns are the “new norm.” Seeking Alpha suggests we may be facing “a lost decade” for performance. Former head of PIMCO, Bill Gross has recommended turning to real estate and even contemporary art to combat the declines and lack of returns from stocks and bonds. Even Warren Buffett has warned Berkshire Hathaway shareholders that learn times are likely to be coming, while he has increased his personal and corporate investments in the real estate industry.
With a new recession and the potential for major corrections always possible individuals need to put some thought into preserving their portfolio and optimizing it for income in retirement. Even those in their 30s and 40s really can’t afford another major dip in their portfolio values, or a decade of zero returns.
In his book ‘Money’ Tony Robbins breaks through many myths and conventional ‘wisdoms’ associated with investing. Two of the most notable lessons from his interviews with the world’s most successful financial experts and money managers are; understanding how high fees impede results, and how the ups and downs of market performance can impact real net returns. Robbins explains that few investors really understand how much they are paying in layers upon layers of fees. If we are in an era where 3% to 5% growth is optimistic in the stock market, and investors are paying at least that much in fees, that means zero net gains. In fact, it means losing due to inflation. Benjamin Graham’s principle of dollar cost averaging is often thrown around as a reason why investors shouldn’t pull out during market dips and major sell offs. Yet, even if you cannot absolutely perfect timing of trades, it does not require a financial genius to figure out that a 50% drop in your stock portfolio value is going to require years of gains to recuperate (before getting back to par). If the market drops 50% this year, and goes up 10% per year for the next 5 years, you are still in the red. In fact; you are still down by almost 20%. Don’t forget to subtract fees and taxes on those gains too.
This is one of the reasons that the world’s largest hedge funds and pension funds are some of the biggest real estate investors. Traditionally pension funds invest in ultra-prime real estate which they see as safe, but often low yielding. In 2015 Canadians spent $8.3B on Manhattan commercial properties alone. Six Canadian pension funds now rank among the globe’s top real estate investors, alongside organizations such as the California Public Retirement System, and Blackstone. The new era analysts have forecast is also certainly a part of the reason that real estate was given its own separate asset class within the S&P 500.
Remote working is also simultaneously creating a massive pivot in how individuals are planning for retirement. Whether it is to avoid employer paid health insurance and other benefits, higher minimum wages, or simply to operate more efficiently and remain competitive more businesses, including Fortune 1000 companies are relying more heavily on remote workers. That’s on top of millions of self-employed business owners and freelancers. A report from Fast Company suggests that 99% of white-collar workers are already doing some remote work, and estimates at least 50% of all workers will be 100% full time by 2020. Forrester says 63M Americans will be telecommuting in 2016, with another 29M remote workers entering the workforce. In some fields and positions 78% of workers are already remote. And these aren’t just low paid ‘work at home’ gigs. Gallup reports that as of August 2015 the majority of telecommuting workers were college grads, in white collar professions, earning $75,000 or more in household income. Those classified as independent contractors and self-employed may find great advantages in being able to contribute far more to their retirement investment accounts via their small businesses.
While Self-Directed IRAs have been around 40+ years, they are really just gaining mainstream visibility and traction. Canada has its RRSPs, the US has Self-Directed 401ks and IRAs, and the UK recently gave its citizens the ability to direct their own retirement accounts; fueling the market with cash rich investment property buyers. So as you can see the trend toward alternative asset investing is taking hold on a global level.