How to Invest for the Next 40 Years
Clients don’t come to Lifetime Financial looking for unrealistic, market-beating returns. We offer sophisticated investing that meets practical needs, like better management of your emergency fund and how to avoid target date fund mistakes. Our portfolios are crafted around carefully selected, globally diversified, low-cost index funds.
We do this because markets are, in the financial jargon, ”efficient” enough that investors can neither effectively time them, nor reliably pick the highest returning stocks. Efficient doesn’t mean predictable. If you study market history and watch it move daily for over three decades, you’ll be cured of the desire to predict returns.
In 2023, the S&P 500 soared to a 24% increase and nearly a new all-time high, defying all pundit predictions. Markets have a way of surprising us because they reflect crowd-sourced human emotion as much as rational investing (this is a central hypothesis of Behavioral Financial Economics).
For long-term investors planning for retirement, it doesn’t matter anyway. Short-term market movements are noise to ignore. That’s why I don’t like to provide frequent market updates, preferring instead to save them for the once-a-decade, dire bear markets for which some kind of reassurance is called.
What happens between now and your retirement is mostly a psychological risk, at least until you are 15 years out. At that point, you should employ a capital preservation strategy and start putting aside increasing portions of money into bonds until you approach your chosen date.
What we (at least those under age 65) should really be interested in are long-term market expectations, usually considered 20 or more years. For two decades, we lived through the Golden Age of investing (1983-2023) during which stock and bond market returns were astronomical compared to any other time in recorded history. A dollar invested in US stocks in 1983 became $21 dollars 40 years later in 2023 after deducting inflation i.e., in real terms. The same dollar in bonds was worth $12 in 2023.
The Economist rightly points out that Golden Age stock and bond returns were more than 3x higher than historical global returns. In this current age, if markets merely return to their long-run (100+ year) averages for the next 40 years (2024-2064) the total returns will be three times less! (See graph below.)
Neither the article’s writers, nor I are arguing that we are headed for a new great depression or presaging apocalyptic events. This is just what happens if we have a reversion to the long-term average. The economic message is that GenX, Millennial, and GenZ retirees will likely need to save more money to have the same amount as those who accumulated a great deal of wealth in this incredible run (mostly boomers and earlier generations).
The causes of the Golden Age outperformance are numerous: American hegemony, economic globalization, low inflation, and a digital information revolution. They all helped, but what really caused the high returns was the economic boost from falling Federal Reserve interest rates. The Fed went from the highs (20%) of the late 1970s stagflation to the low (0.7%) of April 2021. Lowering interest rates has a boosting effect on stock and bond prices. Yes, rates have gone back up and generally, it’s a good thing to have rates at least in the mid-single digits.
This is not an instruction to sell stocks now. Stocks over the next 40 years will still be better than other investments and they will still be the largest source of invested wealth for the mass affluent, second only to primary home real estate equity. Comfortable, long retirement is still very possible, but you might have to save more than you thought if you were using Golden Age estimates.
In fact, you are going to need more stocks in the next 40 years by our sobering estimate, something the article says most Gen Z and Millennials are missing. Get your portfolio set for the next 40 years, give us a call if you want help.