Hacker News Reader

Comment by peteretep | Hacker News Reader

    > "A coming collapse in investment returns"

And yet McKinley are writing research about it, rather than liquidating the company to take short positions, which should tell you something about the pinch of salt required.

View on HN

That would only make sense if McKinsey's main business was investing in the stock market. Actually their main business is selling management consulting, which as a source of profit is only weakly correlated to investment returns.

Also note that they didn't say you should expect a negative return from investing in the stock market. In fact, they said that you should expect a 4-6% return over the next 20 years, rather than the 7-8% return that has been experienced over the previous 30 years.

So they're saying you should expect the rate of return that I've always been told to expect. Where's the news?

I don't think they're claiming that prices will collapse (which is what you would want to short on), but rather that returns will collapse. That over time, the return of say, the S&P 500 will be half of what it has been over the previous 20 years.

In either case, you'd want to sell your shares and invest the money somewhere better. If you believe the article, that is.

I think part of the article's point is that there is no better place to put your money, and that we are likely to see reduced returns to capital across all asset classes. It is possible to have a glut of both capital and labor if there's no innovation in the economy.

(Conversely, this makes it a great time to be an entrepreneur if you have a good idea, but part of the article's point is that most of the low-hanging productivity gains have already been picked, and so it's becoming increasingly more difficult to have a good idea.)

Basically, it could be summed up with the old Dennis Leary song, "Life's Gonna Suck When You Grow Up."

https://www.youtube.com/watch?v=3OjnwxhL72o

>* there is no better place to put your money*

I'm not sure I buy into that in the slightest, alternative asset classes exist for the very purpose of allowing diversity when market returns are poor. Some of them are rough to access as an individual, but others are not.

The real kicker is that the absolute size of a retirement pot is utterly meaningless without reference to the interest and inflation rates during retirement. Let alone what the mortality tables look like when you get there.

You're going to live longer, and so you're going to need to retire later with more money than your predecessors. That means saving towards it from the moment you start work, and ensuring that you access as many different return drivers as possible - even at the cost of some fees. Yes I'm a walking talking believer in DGFs.

No, the point of the article is that all asset classes across the board will experience lower than normal returns. Diversification will not help you.

Whether or not its thrust is correct is hard to say, but that appears to be their thesis.

I only see bonds, and equities specifically mentioned.

Indeed. There are whole investment industries built up around property, reinsurance etc etc because they do diversify. The risks are relatively uncorrelated, so the returns are too.

Honestly, this is a PR/opinion piece designed to get coverage - and that's fine. I'll bet you good money that there are opposing views on the 20 year outlook from different investment experts though.

But then a question is whether the risk profiles for various investments will change - high risk/high reward is one thing, but high risk/low reward is not worth it. So it would be interesting to see what the experts think on how low risk investments will perform vs. high risk, and if those differences are diminishing, how that might impact decisions on one's portfolio.

I'd be careful about how you word that. They are predicting the average return of US equities would be about 1% lower over the next 20 years. Compound interest over time is what means you have to save twice as much to end up with the same amount of savings.

If returns collapse then prices will too, investments are made based on expected returns, if those returns aren't available then the investments won't be made.

OR...

P/E ratios will continue to climb into the stratosphere, continuing to chase smaller and smaller yields.

There's a lot of money sitting in the world, looking to be invested. If it doesn't get invested at all, it will shrink- and no investor wants that.

Reply on news.ycombinator.com