A Blended Return

"But with a rate of return of 1.6% or less, or a negative rate, our children and our grandchildren, if we do not make changes, will in fact not have a secure retirement.  Indeed they will not have the funds when they go to retire to even minimally get by." - John Shadegg

One of the biggest conundrums facing investors today is a blended rate of return.  Since the Federal Reserve raised rates, rates have fallen to their lowest levels since April 2015 which at the time was one of the lowest levels on record.  Furthermore the stock market is clearly in correction mode and appears to be heading for a bear market (down 20% from its highs).  Typically in a bear market the rates of return on fixed income investments are higher as the Federal Reserve raises rates to cool an economy however this time around interest rates are at historic lows and the market is rolling over so the blended rate of return for stock / bond style investors is dismal.

Reading over my blogs of the past few years I have been warning investors of this problem and now it is a reality.  Those of you who have not heeded my warnings are now facing a problem particularly if you are only invested in those two assets.  Those of you who have learned from this blog should have divested into alternative assets that are taking advantage of this market but for the rest of you I believe time is against you.  It appears that low interest rates are here to stay, at least for the foreseeable future, and the stock market with the lack of support from the Federal Reserve will not provide the kinds of return of the past seven years.

This is not only causing a problem for investors but pension funds and endowments are really feeling it.  Consider that they have factored in a blended rate of return of 6% to 8% and those returns have been achieved only because of the stock market movement.  Removing that arrow and in fact coupling low interest rates with a bear market will result in massively underfunded pensions plans.  The result will be that companies will have to fund the shortfall with rapidly eroding income which will lead to losses.  Poor earnings will drag the market lower and around we go.

So at some point, and I do not expect it to be much later than the middle of this year, the Federal Reserve will have to kick in some more quantitative easing (which as we know will not do anything other than kick the can down the road).  This might take the heat off the stock market temporarily but by then I would expect the markets to have fallen by at least another 20%.  Regardless of whether I am right or not it looks like a rocky road ahead and investors should still be looking at alternatives to stocks and bonds not only for the present but for the long haul as it is my prognosis that these two investments will not serve investors well for a number of years to come.

Heaven help us if inflation rears its head but unless oil makes a sudden resurgence or unemployment strengthens considerably it should not remain much of a factor and this should provide some solace for the beleaguered investor however that said your best bet is to look for alternatives.