A few decades ago the investment outlook was hopeful, and choices were clear. Even staid old bonds became attractive.
Toward the end of the last century, U.S. government bonds reached a peak with yields at unprecedented levels, around 14 per cent. Unless one were to assume an apocalypse, things had to improve. If not, and the economy collapsed, it would not matter what one did as everything would perform very badly.
Government bonds indeed did recover and investors there enjoyed a spectacular rise. Yields now hover at under two per cent; further gains have become almost impossible.
Investors certainly have to put their money somewhere. Every option seems fraught with disaster. Commodities have been the best investment over the past generation and gold, for instance, has multiplied in price by 40 times.
Probably further appreciation will occur as governments worldwide would try to cope with a sluggish economy by injecting stimulus. Eventually, that debases the currency, but after the kind of gains already achieved, as a minimum, volatility can be expected. After 1980, gold prices fell by two-thirds in the ensuing 20 years. Gold obviously does not pay any dividends, so investors there must count on further appreciation in price. That is likely, but it will not occur in a straight line.
For the retail investor property is the favourite asset, but there are problems.
As most baby boomers’ families are growing up, large houses will be sold and that group will move to condos or retirement homes, yet lenders have tightened their standards, so nowadays borrowers need much larger deposits than formerly.
While the real estate market shows signs of improvement, the boom conditions of the 1980s are nowhere in sight.
Equity markets are not very appealing. Dividend yields are at historic lows and price-earnings ratios make most share prices at the high end. Renewed growth would favour equities. Furthermore, interest rates will rise eventually (almost inevitably), so dividend payments would be less attractive.
The Deutsche Bank estimates, based on historic norms, the real return on equities here would be less than one per cent.
If we try to grow out of our debt burden or fall back into a recession, it appears that there are no obvious winners at hand. Perhaps all that investors there must count on is preservation of capital and not reach for much growth.