This article is a guest contribution by Neils Jensen, Absolute Return Partners LLP.
"What you as the City of London have done for financial services, we as a government intend to do for the economy as a whole."
- Gordon Brown speaking at Mansion House in June 2002.
I was born in 1959, right at the tail end of the baby boom. I consider myself less fortunate than my parents, both of whom were born in 1935, when Fred Perry won at Wimbledon and President Roosevelt pushed through new social security legislation in the US as part of his so-called New Deal (some things don't die easily!).
My parents are no different from most other parents. Entirely consistent with Modigliani's life-cycle hypothesis (which I wrote about in the October 2009 Absolute Return Letter - see the link here), my parents didn't really start saving for their retirement until they reached their mid 40s. That effectively gave my father a good 20 years to ensure that he and my mum can enjoy their retirement without worrying too much about the balance between in- and outgoings.
Chart 1: Return on global equities since January 1970
My parents were lucky, because they started saving in earnest in the early 1980s, at the outset of what would become the biggest bull market of all times and, by the time the bull market came to an end in 2000, they were home and dry. In that 20 year period, a global equity portfolio generated an annualised real return of just over 13% in dollar terms, equivalent to a total inflation-adjusted return of about 850%!
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Unfortunately, not everyone has been that privileged. My generation has only been saving for the last decade or so, and we are still under water. $100 invested in April 2000 is worth about $77 today in real terms. I, together with hundreds of millions of other baby boomers across the world, am now chasing whatever returns I can find to ensure that my retirement can be enjoyed in relative comfort. But the force is not with us. The equity market continues to be a dangerous place and the value of our property has also fallen precipitously.
Meanwhile, aggressive advertising feeds us with the fallacy that, as long as you invest for the long term, equities will deliver solid returns (see chart 1 for 'evidence' of the long term positive trend in global equity markets). Yes, provided your investment horizon is 30 or 40 years, that may indeed be the case but, as I have already pointed out, most of us have only got 20 years to do the job.
However, what the sales people don't tell us is that it absolutely matters when you invest and what the rate of inflation is whilst being invested. Take a quick look at chart 2 where I have made the appropriate adjustments. Suddenly, the ten year return (since April 2000) does not look that attractive: -25% or thereabouts in real terms. Ten years is half a life time of investments for most people. No wonder many investors are deeply frustrated.
Read the complete letter here.
