Is America just not a good investment anymore?

by Pop on October 29, 2010

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A lot of smart people are moving their money out.

If you invest in Vanguard’s target retirement funds, you received a message earlier this month that your international allocation is increasing by around 10 percentage points. Vanguard’s explanation was pretty vague—something about increasing diversification and reducing volatility, an argument that could have been made more than a decade ago.

But we’re getting it now, which leads me to believe that the mutual fund company’s investment gurus are coming to the same realization that many economists and investors have already reached: America might not be a great investment anymore.

That doesn’t mean the U.S. is a “poor” investment, just that people no longer expect it to deliver the returns required to be a “good” investment. That is, if you save only 10% of your income, you likely need an investment return of 10%+ to retire with the same standard of living. Domestic stocks might not deliver that.

Is a 10-year-old “normal” still “new”?

Last month, PIMCO manager Bill Gross penned this note:

If a “stocks for the long run” Jeremy Siegel grew used to historically “validated” 9 to 10% returns from stocks prior to writing his bestseller in the late 1990s, then the experience of the last decade should at least temper his confidence that the “market” will deliver any sort of magical high single-digit return over the long-term future. And, if bond investors believe that the resplendent and abundant capital gains of the past 25 years will be duplicated from yield levels of 2 to 3% – well, they just haven’t been to Japan, have they?

There is nothing that says stocks have to grow at 8% or 12% or any other number on the long-run. Your “long-run” is probably only 40 years or so of an investment life-time. So it doesn’t take much of a hiccup in that number to mess up your investment plans.

Let’s say, for the sake of example, that you’re only saving in a Roth IRA, which you max out every year with a $5,000 contribution. You do it from the age of 25 until you retire.

Scenario 1: Your investments return 8% per year for the entire time period.

Result: You save $1.19 million for retirement. That translates into a $47,600 retirement income before Social Security is added. Not great, but ok.

Scenario 2: Your investments return 8% per year for 30 years, but in the last 10 years, they only return 2%. In other words, your prediction of an 8% return is dead on for three-quarters of your investing lifetime.

Result: You save $683,000 or so for retirement. That translates into $27,000 in income before Social Security.

You can be right for 30 years, but end up getting 56% of your expected income if you’re wrong for the last 10. And I ran the scenario as if you were still making money in those last 10. It’s not impossible for investments to go nowhere in a decade.

Which leads to a desperate search for alternatives

I recently spoke to a friend who dissuaded a mom and pop investor from sinking a good potion of her retirement savings into a Forex account.

For the uninitiated, foreign exchange accounts let you trade currencies—i.e. the dollar, the Australian dollar, the euro, New Zealand kiwi, etc.—but usually only in humongous blocks. In other words, you can’t just buy 100 euros without getting an awful exchange rate. You have to use extreme leverage to buy 10,000 euros or 100,000 euros. If your account loses even a tiny portion of its value, you have the potential to be completely wiped out.

I suspect the aspiring retiree had come to the realization that many of us are. My friend had just finished giving a talk on the general investing landscape, and scene isn’t pretty. Economists have forecast slow growth for the U.S. economy, high future inflation (which hurts savings), and U.S. stock returns that are half of what we saw in the 90s. Now, there’s also talk of us being in the midst of a huge bond bubble that will pop once interest rates begin to rise from their historic lows.

So in summary: Stocks suck. Bonds suck. Cash sucks. Is it any wonder investors are giving gold and Forex a shot? Personal finance articles mostly skip or attempt to dissuade people from these alternatives, but they don’t give investors another option.

So are there viable alternatives?

Ask Bill Gross and the folks over at PIMCO, and they’ll tell you to check out emerging market stocks. After all, China and India are expected to continue to experience near double-digit growth for the foreseeable future, versus the anemic growth for the U.S.

I’m not totally convinced. A business can experience double-digit growth and still be overpriced. I’m also not totally convinced that countries like China are safe for investors. You have a government desperate for the appearance of growth and no free press. Seems like an environment that could lead to rampant corruption by individual companies, especially when you throw local, all-powerful bureaucrats into the mix.

So what am I doing? I’m saving more. Bumping up your savings rate–say, from 10% to 20% or 30%—is the only sure thing in investing.

Putting that aside, taking a shot on international markets, as Vanguard and PIMCO are (never though I’d marry those two in the same sentence), might be the best option in a sea of poor options. Just understand that you’re doing it because that increases your tiny chance of getting that big investment return into a slightly less tiny chance.


{ 4 comments… read them below or add one }

FB @ October 29, 2010 at 8:58 am

My plan has been the following so far

1. Keep money in liquid cash accounts (I am leaving the country soon)
2. Living on under $1000 – $1500/month and banking the rest
3. Taking all the contracts I can before I leave
4. Investing a chunk of money in Brazil
5. Investing a chunk of money in dividend producing mutual funds
6. Did I mention the major savings?

Rob Bennett October 29, 2010 at 11:55 am

In the early 1980s, Business Week was telling us about “The Death of Equities.” So I guess America was dead then too.

America is dead for a time because we all got suckered into following Buy-and-Hold investing strategies for a time. This too shall pass.

All this doom-and-gloom talk will pick up after the next crash. That’s when stocks will be priced to give AMAZING long-term returns.

It’s not America that is dead. It is Get Rich Quick investing strategies.

That’s my personal sincere belief, in any event. No offense is intended to anyone who follows Buy-and-Hold.


MossySF October 30, 2010 at 10:04 am

Take a broader view of history and “saving more, working more” was always what people considered normal. It may be that U.S.A. 1950-2000 was the anomaly but from an individual’s point of view, 50 years is a long time and we easily lose generational knowledge. After all, our parents kept waiting for the shoe to drop and it never did so we assume it won’t drop for us either.

Kevin M November 10, 2010 at 12:42 pm

You could have added the fact that more and more, US multi-national corporations are earning a higher percentage of their revenues outside of the US. I think there is some built-in international exposure there. And possibly an explanation why the stock market continues to rise despite high unemployment and other issues here.

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