McKinsey & Company is a big consulting firm—9,000 consultants and 2,000 researchers around the world—that companies hire when they need advice. They’ve been at this for a long time, and they have a history of helping small companies to get big, big companies to get more profitable and sick companies to get healthy.
I get research reports from McKinsey every once in a while, and they’re usually beautifully designed, well written and interesting in an abstract kind of way. If the topic happens to be what you do (like, say, the stock market), you’ll probably read them. If not, not.
The report that reached my email in-box on Thursday had the intriguing title: “Why investors may need to lower their sights.” (Note how the avoidance of Capital Letters makes things a little edgier; that’s the McKinsey Difference!) It took seven people to write this little piece of analysis, so you know it must contain really valuable information.
As a public service, I have selflessly read the report, and here’s what it says: Your returns on U.S. stocks and bonds and European stocks and bonds over the next 20 years will probably be worse than they have been over the past 30 years—maybe a little worse if the economies recover quickly, or a lot worse if slow growth continues.
This news shook my world to its foundations, as I’m sure it is shaking yours right now. Or maybe not.
There was one illustrative anecdote in the report that hit home. The authors point out that “a two-percentage-point difference in average annual returns over an extended period would mean that a 30-year-old today would have to work seven years longer or almost double her savings to live as well in retirement.”
And if I were 30 years old and thought that the standard strategy of putting money into a diversified portfolio of stocks and bonds for 35 years (!) was going to let me retire in comfort, this report might have me squirming in my seat a little.
Similarly, if I were a pension fund manager who expected to keep up the rate of return necessary to deliver on a defined benefit pension plan’s promises, I’d be tempted to start drinking heavily. Ditto for asset managers who live on management fees and insurance companies who actually make their money on investment returns.
But as an individual investor with a majority of my retirement income being actively managed by people I trust (me and Mike Cintolo)—not in index funds, bond funds and balanced funds—I don’t give a rip!
As I’ve been writing here for years, the standard practice of putting your retirement income totally at the mercy of the stock market by loading up on index funds is just foolish. The long rally in the S&P 500 from 2009 to 2015 has restored the faith of many indexers in the strategy. But if you’ve forgotten how the stock market can treat people who trust to the relentless progress of the major indexes, here’s a 20-year chart of the S&P 500 to refresh your memory.
And if you diversified and put part of your retirement 401 (k) into the Nasdaq, the situation is even worse. The Nasdaq took exactly 15 years to get back to its 5, 132 high—March 2000 to March 2015. (It’s a painful chart, but I think you need to see it.)
The gloomy McKinsey report says nothing about what the average investor is supposed to do in the face of diminished average returns, but I see only two alternatives.
Either you
1) keep following the same indexing strategy but double your rate of investment or
2) look for a more active strategy that will keep your returns higher than the indexes in good times and reduce your risk when the stock market turns ugly.
Coincidentally enough, Cabot is designed for people who make the second choice. Cabot’s growth investing advisories look to beat the stock market by finding a few strong performers every year that will deliver returns strong enough to leave the indexes behind. Cabot’s value stock, dividend stock, small-cap stock, and options trading advisories are all similarly active, looking for the most profitable opportunities, not the ones that take the least work.
You will have to pay attention and be ready to take action, but Cabot will tell you what to do each step of the way. And the change in your relationship with your retirement portfolio will be dramatic. Instead of sitting in your boat as the currents and winds take you wherever they want, you will be under your own control and moving under your own power. Time to raise the sails!
If you’re ready to get active, a click here will get you started.
P.S. I’m sure the McKinsey report I was mocking earlier will be useful to someone, but I’m not sure who. All predictions about what the stock market will do in the future are written in sand, as a quick look at the two charts above will show. I think you’re always better off knowing what markets are doing right now and acting accordingly, than you are trying to see through to chaos to glimpse the future. The McKinsey report was free, and I think it was worth at least twice that.
This Week’s Fortune Cookie
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Contrary Opinion buttons here.
Mike’s comment: Many investors confuse theory for practice—they believe a working theory (when oil prices fall, so too will the market, etc.) is all there is to know. But once you put hard-earned money at risk in the market, many of these theories get blown to smithereens. In practice, it’s practice that counts, which means learning all of the ins and outs of your methodology—and yourself!
Paul’s comment: In theory, economic forecasting should be able to predict the future. In practice, it can’t. Right now, we can’t even forecast the weather for next week with real accuracy, despite the supercomputers on the case. And the economy has even more variables than the weather!
Sincerely,
Paul Goodwin
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