Foreign & Colonial Investment Trust

Alexland

Thrugelmir wrote: »

Interesting view on expected future market performance (in the US). Far below that achieved over the past 25 years. Before costs a net 2% above (US) inflation. If £ strenghens against the $ in time. Could make holding US investments a negative sum game.

Yes and the double-whammy of a stock market crash at the same time as the pound strengthened again could cause a nightmare scenario for many UK investors who might see losses in excess of their historic risk based expectations. For a more comfortable ride it might be worth starting to hedge some of the currency exposure.

Alex

System

Thrugelmir wrote: »

Thanks for posting this.

Interesting view on expected future market performance (in the US). Far below that achieved over the past 25 years. Before costs a net 2% above (US) inflation. If £ strenghens against the $ in time. Could make holding US investments a negative sum game.

What is a negative sum game? I know what is a zero sum game.

Thrugelmir

Alexland wrote: »

Yes and the double-whammy of a stock market crash

Crash driven by a flight out of equities perhaps. If the Fed continues to raise interest rates in 2019. As investors tend to move in herds.

Iain_For

Alexland wrote: »

Yes and the double-whammy of a stock market crash at the same time as the pound strengthened again could cause a nightmare scenario for many UK investors who might see losses in excess of their historic risk based expectations. For a more comfortable ride it might be worth starting to hedge some of the currency exposure.

Alex

So, most of us, if we hold bonds, probably have some currency hedging already. Hedging equity risk, however, seems a more complex proposition. Depending on where you are at in the investment lifecycle may make more sense to hold cash in your home currency on a 5 or so year timescale.

Iain_For

Thrugelmir wrote: »

Thanks for posting this.

Interesting view on expected future market performance (in the US). Far below that achieved over the past 25 years. Before costs a net 2% above (US) inflation. If £ strenghens against the $ in time. Could make holding US investments a negative sum game.

If I’m half as sharp as Jack Bogle at 89, then I really will have beaten the odds. Vanguard have been forecasting reduced market returns over the next decade, not just in the US.

seacaitch

If you wish to see some very sobering asset class return forecasts take a look at GMO's 7-Year Asset Class Forecast (NB free registration required):
https://www.gmo.com/research-and-commentary/strategies/asset-class-forecasts?docId=d1c1452e-8b9d-6433-9213-ff0000a1a898

...where GMO forecasts only EM stocks and debt to have positive annual real returns over that 7yr timeframe. GMO's forecast model has a good historic track record but of course could be quite wrong on this occasion.


Rob Arnott's Research Affiliates 10 year real return (annual) forecasts enjoy a longer time horizon and are somewhat cheerier, but are otherwise in-line with the pattern of GMO's sobering 7 year forecasts:
https://pbs.twimg.com/media/DqKtczcVAAE9BUW.jpg

Both GMO's and Arnott's models are based on assumptions of mean-reversion of valuations, and so the driver for the weak forecasts for US markets is captured by this chart:
https://pbs.twimg.com/media/DqKurNTUUAAebpB.jpg

You can mess around with Research Affiliates' model yourself, switch between two forecasting models, and generally play around with the inputs, the plots and data:
https://interactive.researchaffiliates.com/asset-allocation#!/?currency=USD&model=ER&scale=LINEAR&terms=REAL&_k=6kfnyi


These are all just forecasts. The reality may turn out to be quite different from the broadly similar pictures painted by Vanguard, Research Affiliates and GMO (for example, valuation multiples could continue to expand to never-before-seen levels, generating a vast bull market bubble, as opposed to any mean reversion of valuations occurring). But perhaps worth taking note of the forecasts and setting your expectations conservatively: if future returns are as low as forecasted in the models above you'll be mentally prepared at least.