The Productivity Conundrum

"You can see the computer age everywhere but in the productivity statistics."
-Robert Solow

Are you a typical 60/40 investor? If so, it is time you start to think out of the box. As I pointed out last month, the 40% you allocate to bonds is not going to deliver much of a return in the years to come and, today, I will do my best to convince you that the 60% you allocate to equities won’t do the job either.

Let’s start by digging a little deeper on how equities have actually performed historically. Since 1900 – i.e. for the past 118 years – the compounded annual real return on a global equity portfolio has been 5.1% (Source: Credit Suisse Global Investment Returns Yearbook 2017). Let’s call that the long-term average. Here is the problem. An entire generation of investors has grown up with returns vastly superior to that and think 10%+ per annum is a human right.

The golden period of the last century was unquestionably the 20 years from 1980 to 1999 - a period often called the Great Equity Bull Market. Interest rates dropped dramatically throughout this period, whilst the baby boom generation moved into their peak spending years, the combination of which yielded very robust earnings growth. No wonder equities returned no less than 10.6% per annum during this period (Source: Credit Suisse Global Investment Returns Yearbook 2017).

Since 2000, away from the US, equity returns have been much more modest. A global equity portfolio has generated only about 2% per year on an inflation-adjusted basis – less than half the long-term average. For many years to come, and for reasons I will spell out in a minute or two, I believe equity returns will be very much in line with the past 18 years. 0-3% average annual real returns happens to be my central forecast for 2018-2050.