Last 25 years & the next 25 years.

There has been a lot of discussion about a low return investment environment and the fact that all investors need to realise this in the coming years.  The good old days of a 20% return in a year are unlikely to come back.

In particular, an article by Marcus Padley in the Sydney Morning Herald, 11th Aug. 2012, made the point that retirees that have invested well have been in a unique position from the high rate of returns over the past 25 - 30 years, despite the GFC. Future, younger investors will struggle to attain the same returns.

How could this be? I will compress an analysis into as short an article as possible.

  • Following the success years of the post war period – the overall environment of high regulation constrained further growth in the 1970′s.
  • Additionally higher oil prices in the early ’70′s caused inflation that was not capped quickly.
  • The RBA and other central banks were not fully independent of government and interest rate decisions were highly charged and politically divisive. Invariably rate changes were too little, too late  and inflation became embedded in the real economy and future expectations. Investment returns may have looked good – but in real terms, after inflation figures they were poor.
  • The 1980′s brought a break in the thought process, through the election of Margaret Thatcher and Ronald Reagan, both flag bearers for a de-regulated economy and independent central bank decision making. Closely aligned to a wave of conservative economic think tanks.
  • Deregulation and independent pro-active central bank interest rate decisions brought down inflation and promoted economic innovation and growth.
  • From the 1980′s through to 2000 inflation and intertest rates fell and economic growth and investment returns rose in real terms.
  • Investors benefited dramatically over the 20 year period and despite the GFC of 2008, various investments produced solid returns from 2000 – 2008, nearly a total of 30 years of growth with poor years in 1991 -1993 and 2000 – 2004.

While I do not overlook the failings of the poorly regulated US banking system that caused the GFC – the general trend over 20 – 25 years produced results.

We are now at a point where there are more calls for re-regulation of banking and finance as well as the fact that interest rates are as low as they have ever been to maintian some growth.

The outcome for all investments, shares, property, and bonds over the next 20 years is likely to be less impressive and with lower returns. Inflation may return and central banks will be quick to maintain a low inflation environment. Interest rates are likley to rise again in 18-24 months in the US, asthe US economy gathers a reasonable recovery and inflation may become an issue. Rising interest rates will dampen investor returns in shares, property and bonds in particular.

Since this is likley to continue for a long period the outlook for the next 20 years is far more subdued than the past – and the next 10 years in particular.