The Easy Money Has Already Been Made

As a financial journalist, I talk to lots of financial planners and investment advisors on a regular basis. One common thread in their comments is how hard it is to make money – or, more accurately, not lose money – by investing in the financial markets.

"Almost nobody ever makes money consistently over time in the stock market – I mean almost no one," says one adviser who's been in the business for more than 30 years. If people make money one year, or even three or four years in a row, they wind up losing it when the correction comes, and then they're back to square one – if they're not actually in the red.

Indeed, the goal for many advisors is simply to "preserve capital," as they say in the business, which simply means not to lose money. "You win by not losing big," this advisor says. "Make it and keep it," says another, who's been managing clients' money for more than 50 years.

Why such modest goals? Simply looking at a long-term chart of the S&P 500 or U.S. government bonds shows the dramatic rise in prices over time. Indeed, the experts tell us, by investing in stocks with a by-and-hold strategy, you should be able to make an annual return of 8% over the long term.

Yet lots of people, including many smart ones, can't seem to do it, at least consistently.

One of the reasons, of course, is that when people do make money in the market, they think it's easy and that they're invincible. "But then they run right into the ditch when the correction comes," another advisor told me. They ride their winners until they're losers.

Another problem is investor shortsightedness, or rather, today's needs overtake tomorrow's.

A study released last month by the Center for Retirement Research at Boston College confirmed that "distant needs, like retirement saving, consistently take a back-seat to more immediate concerns. Financial satisfaction depends much more on meeting day-to-day, rather than distant, needs."

That study was a follow-up to a similar study it did back in February, appropriately called Dog Bites Man: "Americans Are Shortsighted About Their Finances." That study found that "Americans need to save more on their own for retirement, but human nature suggests they will focus more on day-to-day financial needs."

More surprisingly, the study found that "even households that are in reasonable shape in the short term do not seem to focus more on distant concerns like retirement saving. And households that are more financially literate appear only modestly more attuned to long-term financial issues."

Where am I going with this?

For people who do have money to invest, it's going to be even harder to make money in the coming years than it is even in normal times, especially compared with the easy money of the past six years.

Research Affiliates, in its May newsletter, expects "about 0.7% average annual real returns over the next decade for both core U.S. bonds and core U.S. equities."

That's over the next decade, now, not just next year.

Why is the firm so glum?

"Likely, we have entered a period of secular stagnation," says Shane Shepherd, the firm's head of macro research. "In a world of secular stagnation, the Federal Reserve may not be able to achieve a real rate of interest low enough to match the long-run equilibrium rate of interest." And equities and bonds are both heavily dependent on that real rate of interest, the firm says, "which serves as a key building block for all long-term investment returns in an economy."

"With slow GDP growth propagating negative or near-zero real interest rates, our message is that expected returns across most asset classes should be lower than their long-term averages," Research Affiliates says. "A return to higher GDP growth and associated higher real interest rates would certainly brighten this picture, but that requires faith that 'temporary headwinds' will dissipate at some point. We simply don't have that faith. We see evidence of secular stagnation continuing in the long term, and the consequent dampening of growth, as our nation's and the developed world's inescapable destiny."

I wish I could find something to refute that rather pessimistic outlook, but I can't. So, if you think it was hard to make money in the markets before, you ain't seen nothin' yet.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.