Broker Check

The Future of Low Returns

In this episode, Royal Standley talks about the predicted stock market lows for the next 10 years. Royal explains the current stock market and predictions for the future based on current and past examples of similar markets.

Episode 59 Transcript

Intro: Royal Standley of Oregon Pacific financial advisors offering securities through United Planners, Financial Services, member of FINRA, SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their life by design. In these episodes he relates his expert financial insights and discusses timely topics. Royal strives for excellence and has a passion for sharing his knowledge and supporting his community. Now onto the show.

Aric Johnson: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Royal, how are you today?

Royal Standley: I'm doing well, Aric, how are you?

Aric: I'm doing fantastic. I've been watching the news a little bit, and I know that you've got some fires burning up there and around your area, you all safe, everybody good?

Royal: Yeah, we're all safe here in Southern Oregon for the most part, but we are surrounded by quite a few large fires. And this seems to be an ongoing theme each August, where we are pretty socked in with smoke. So right now the expectation is, is we're going to have smoke here in the, uh, the valley until we get that first rain hopefully sooner rather than later.

Aric: Yeah, absolutely glad to hear everybody's safe. I know that the folks in the office have been working hard. And you sent me some notes today about today's podcast tonight and I find it really, really interesting. You said that we're going to be talking about planning for low returns in the next 10 years. And I know that you've said many times you don't have a crystal ball, but obviously there's a reason that you picked that topic. So why are we talking about this today?

Royal: Yeah, right now, I think if we're looking at the economy, we're looking at the stock market, we're having another phenomenal year. In the stock markets in the US are about 15% up so far year to date. Last year was a phenomenal year, even with everything that was happening in the country,

Aric: Mm-hmm.

Royal: With COVID and the economy, the shutdowns, et cetera, et cetera. So we'll kind of touch on why that was, but what we're looking at, and we don't have a crystal ball. We're not trying to time the market,

Aric: Mm-hmm.

Royal: But we are trying to be realistic about how the markets have functioned in the past and how we should be looking at where a market like this is and what has happened historically, when markets have been as high as they are from a, if we're looking at a price-to-earnings ratio,

Aric: Mm-hmm.

Royal: What happens when a price-to-earnings is this high? What do the next few years look like from that standpoint?

Aric: Okay. So where do we start? I mean, that's a lot of info.

Royal: Right. And this might be a little bit more of a technical podcast, but please forgive me for that. We're going to try to just kind of touch on these, so we give our listeners a chance to just kind of understand where we're looking at right now. If we look back over the past 12 years, basically from, let's say 2010, after we had begun the recovery out of the financial crisis. The us stock market has done phenomenally well, if you focus specifically on growth and big technology companies like Google, Microsoft, Facebook, et cetera, they have really led the charge there and driven op returns in the stock market. So when we look at the stock market and their valuation, one of the primary things you can use to look at how fairly priced a market is, is price-to-earnings ratio. That basically is what is the price divided by its earnings of a stock. And we can do that for the entire stock market, for instance, the S&P 500, and really dive into how overpriced that is. Now, there are some debate there on what's overpriced what's under, but usually a kind of a fairly price market is a stock that is trading for, let's say, 15 to 20 times earnings. Getting up to that 20 times, earning number might be a little too high. There might be stretching over into an overpriced market. Right now if we look at the S&P 500, we are above 33 times price-to-earnings ratio.

Aric: Mmm.

Royal: So what that means is, is we are very overpriced historically in the S&P 500 in the US stock market. So what that means is the markets are very overpriced and when that happens, historically, what we see coming out of that is there has to be a correction somewhere. Either prices have to come down dramatically or earnings have to increase dramatically. Historically what has happened when we start to get into a scenario like this with the markets being so overpriced is we have very low returns in the markets for a period of time. And that's where something called Capital Market Assumptions comes into play. Capital Market Assumptions is something that, that advisors and institutions do to really kind of set out what their expectations are for the markets going forward. It's not a crystal ball. It's usually over, you know, a 10- or 15-year period. What are the assumptions we're using for what returns will look like over the course of the, kind of the next midterm period we're looking at. And if we're looking at the Capital Market Assumptions that some of the biggest investment companies came out with at the end of last year, so before we had this big run-up in the markets, they're pretty shocking from the standpoint of what we've become used to in the stock market and from bonds. So I'd like to just kind of take a moment and kind of go over a few of those,

Aric: Okay.

Royal: then we can kind of talk about what that looks like.

Aric: All right. Sounds good.

Royal: So for instance here, if we look at JP Morgan, for instance, so JP Morgan, very large asset manager, their prediction for the U S equity markets over the course of the next 10 to 15 years is about 4%. A little over 4% is what your average rate of return will be for the US market. BlackRock was about five. Vanguard's coming out with a range between about four to 6%. Those are really much lower estimates than what we have seen in the stock market. The US stock market has been averaging closer to 9, 10, 11% over the last few years. So really we're cutting those expectations in half. If we look at the US bond market, all of those estimations over the course of the next 10 to 15 years really range between 1- to 2%, without a lot of variation there. That's really the expectation and those are not adjusted for inflation. So the expectation here is over the next few years, the bond markets probably will not be returning enough to even keep pace with inflation.

Aric: Hmmm.

Royal: The one that really caught my eye is for Morningstar. Morningstar came with their Capital Market Assumptions going forward saying the US markets are probably going to be in a negative environment for the next 10 to 15 years, meaning that their estimation, their assumptions are that the U S the market is going to lose about 10 basis points per year, over the next 10 to 15 years. And the US bond market is going to return 1%. So they're basically saying that US stocks and US bonds, there's going to be literally no return there over the course of the next 10 to 15 years.

Aric: Hmmph. That doesn't sound good.

Royal: It doesn't, it doesn't. The other thing that's really important to look at here is when we look at this and we go, okay, well there'll be 4% or it'll be 5% or maybe it'll just be a slightly negative or flat return. Markets don't move in straight lines. So that's not a straight line return of 4%. That is 10 to 15 years with some very, very high volatility in the markets. We're not in the prediction game of what kinds of downturns are we going to see over that course of that time. But if we look back at another decade where we had pretty dismal returns, which is, was, was the first decade of the century, we had a major crisis there with the tech fall and the tech collapse in 2001 through to 2003,

Aric: Mm-hmm.

Royal: We had a little bit of a recovery, and then we had another giant fall with the financial crisis in 2008. So for a ten-year period, if you were just looking at the S&P 500, that was a very rough period of time, kind of all around there for the stock market. The benefit that we had there was we had higher interest rates in the markets and better returns from the bond market. So maybe that helped to boost those numbers a little bit. That's not the environment that we're in right now and with interest rates being so low right now. And that's really what has been, I think the biggest driver of asset increases here is very, very low interest rates. Those interest rates, you can almost think of that as we're borrowing future returns and moving them into the present. We're making it very cheap to borrow money that money and all of the government stimulus, et cetera, et cetera,

Aric: Mm-hmm.

Royal That's being created right now are flowing into these risk assets, pushing up the price. And there's just nowhere for them to go on the upside. Now that doesn't mean that the market that we're in right now, couldn't continue another few years. There's still a lot of pent up demand with the COVID shut downs. There's a lot of supply chain issues. We're still working through. We could go through another, a shutdown here. We're seeing mask mandates come back into things here,

Aric: Mm-hmm.

Royal: In Oregon. There are still some interesting headwinds and tailwinds that we're dealing with right now. But when we start to look out past, let's say 2022 into the future, that's where a lot of this analysis is starting to turn pretty negative.

Aric: Yeah. So what do we do?

Royal: Well, that's an excellent question. How do we, as advisors, work with folks and look at really poor returns from the US bond market.

Aric: Mm-hmm.

Royal: So the first thing that we need to look at, and we'll kind of separate this between bonds and equities or stocks is what are some alternatives that are out there and are there different things that we can look at to really maybe still try to get a decent return without dramatically increasing the amount of risk? So for instance, in the bond markets, as an alternative, some of the things that we can look at using that we have on our show, Is, we can always look at something like an annuity, either fixed or an equity index, as a replacement to bonds. The nice thing with those types of instruments is they do have a downside guarantee for the most part where you're not gonna be subject to interest rate risk as interest rates begin to rise. Another option is other income producing securities like preferred stock, perhaps some real estate holdings that aren't subject necessarily to the volatility in the stock market that really just provide a good, solid uh, dividend to investors. We will, I'll say that in Capital Market Assumptions, real estate holdings are still priced fairly well. And then that's looking more at the commercial side of things versus the residential side of things. I think the residential market is being affected pretty greatly by these low interest rates.

Aric: Mm-hmm.

Royal: And we're seeing those prices go up. We don't know what that's going to look like. It could be a flattening out of real estate prices for a few years while we catch up, or it could be a decline as interest rates rise. We want to be very careful with making sure that we're not having our clients overextend themselves, leveraging up in a low interest rate environment where any sort of pullback will wipe them out.

Aric: Yeah.

Royal: We saw that quite a bit in the 2008 run up. Where you had people really buying homes and rentals where they had no business buying them from an income standpoint or an asset standpoint.

Aric: Got it. Yeah. Yup. Absolutely. We know what happened after that. Right. I mean, when that happened, there was clear, clear problems because of that whole situation.

Royal: Right. And that's the other issue that we don't know, what it will look like. For an individual in 2008 who had over leveraged themselves, they might've blown up their own balance sheet,

Aric: Mm-hmm.

Royal: But because it happened to so many people, it began to affect our other institutions like the bank and mortgage industries. And all of a sudden you started to have this cascading effect. And a collapse in asset prices, which caused a collapse in a number of banks and number of lending institutions. And so that's always the concern there that it's always hard to get our hands around is where are there places for that contagion to spread when we have an artificially low interest rate environment like what we're living through right now?

Aric: Yeah. Absolutely.

Royal: And so one thing I want to refer listeners back to is we just recorded a podcast on this episode, 57, preparing for winter, which really talked about how to prepare yourself for the next downturn. It wasn't really going necessarily into your portfolio holdings. But what we were focusing on is how can you shore up your balance sheet? How can you make sure that you're in a good position for the future, by making sure you've got that emergency fund, making sure that your mortgage is on a low fixed interest rate, how to make sure you're not overextended with that and that sort of thing. So we really just want to encourage people to kind of look at all of that. And that's what we're here for. We're here to help you navigate all of these different decisions and make sure you're not taking on too much risk or don't realize the risks that you're taking on.

Aric: Yeah, absolutely. All right. So, what is the next thing we're going to be covering?

Royal: Yeah, absolutely. So, the next piece of this is looking at the stock market. If the US stock market is going to have such poor returns, what should somebody be doing there? Number one, it's something I've come back to many, many times is preaching about diversification. I am the first to admit that if you did not have any exposure to international holdings over the course of the last 10 years, you probably did better than someone who had exposure to, to international markets. Right now, what we're seeing is international because it has lagged so much over the last 10 years actually has some good potential in the future, especially in comparison to the US market. So making sure that you have that exposure to the international markets is kind of number one here. How can you diversify away from those low returning us markets and what we think might be happening here?

Aric: Mm-hmm.

Royal: The next area that we do quite a bit and is tactical manner. Tactical management, we can do this both in bonds and stocks is we have particular managers that we have used for years that are very good at shifting portfolios out of certain asset class, as they start to see weakness. And by doing that, they can help almost hedge a portfolio on the downside by shifting into a more low-risk asset when the markets begin to crumble. And then they can shift back in as they start to see those markets recover. They're not a hundred percent, but they have a very good track record at doing this.

Aric: Mm-hmm.

Royal: So that's another area that we're looking at for clients is do they need that tactical management piece?

Aric: Okay.

Royal: Another area I would say is if you're the type of investor who just said, well, I'm just going to buy the S&P 500 index fund, and I'm just going to sit on it and not pay any fees and do this. That is probably not a great strategy for the next 10, 15 years. It's worked very well over the last 10. No doubt about that. But I think moving away from passive investments in a market where you're going to have to make some very specific choices from an asset allocation standpoint, I would probably start looking at where can I diversify away from those low-cost passive investments that just buy everything and get a little bit more specific. I think we're in at an interesting time here where coming out of COVID with everything that's happened from a medical standpoint, as well as kind of the work from home movement, upgrading our infrastructure and providing more kind of broadband infrastructure across the country. We're going to see a lot of new technologies come on board. So you might want to be looking at where to be focusing from a clean energy standpoint. That is going to be a major shift here over the next few years. Looking at what new technologies are coming on board that are going to be with us for the next, you know, 20, 30, 40 years. And then also being very wary of some older company names that might be going out of style, just because of changes in the environment. For instance, you know, you might want to look at energy companies a little bit differently, especially oil and gas companies, as there is a major shift away from utilizing that because of climate change and everything that's having to be done to combat that. You might also want to look at some other alternatives as new technologies come on board. And for instance, nobody could really predict what would have happened in 2005 with the creation of Facebook and how that really changed the game. So being on the lookout for those new areas of innovation and new areas of connection, I think are going to be really important over the next few years. So being, being specific on where you're investing those dollars, I think is very important.

Aric: Yeah. Again, just seeing the different bits of news as a consumer, you just never know what to pick and choose and look through. But when you say technology is a new technologies, there seems to be something new every day. And so it's interesting how much development is being done. And that can be very, very tempting, but again, it's not something that I think. I feel comfortable doing on my own and just saying, hey, you know, I want, pick technologies. I really need somebody to guide me. And so I know we're going to get some contact information at the end of this podcast, Royal, because I know that your listeners are getting a ton today. But, uh, before we wrap up this podcast, before we dive in, I'm going to do that again, Royal, that sucked.

Royal: You can do it. I believe in you.

Aric: Thank you. You got all that smoke in my eyes. And it's something, honestly, I don't want to do on my own. And I know that we're going to be asking you for some contact information at the end of the show here. We're not at the end audience just to let you know, but I just had to say that cause it, it is something as consumers. I know that we all are inundated with all sorts of information. So what else do we need to cover in today's podcast before we wrap up?

Royal: Well, I think the other most important part of all, this is all of this advice is very fluid. And it, the biggest factor here is where are you at in life and what are your needs? So for instance, if you're just starting out, I really don't think it's worrying too much about the allocation of each dollar. It's really saving the money and building that up. It's looking at a good diversified portfolio and starting just to build well. So if you're just starting off, get started today.

Aric: Mm-hmm.

Royal: What we're going to see, you know, we talk about that low return environment. But what that really means is we are probably going to have a lot of volatility over the next 10 to 15 years. And if you're starting your 401k or starting your investment account, and you're just systematically putting money into it, there's going to be some amazing opportunities to buy as the markets fall and as they recover. If you're just consistent with it. So if you're just starting out, just get started. There's going to be some great entry points let's say into the stock market, if you're comfortable with that level of risk. And, you know, we have that good discussion quite often with younger folks

Aric: Mm-hmm.

Royal: About over the long run, holding stocks has been a great way of doing it. Don't worry about trying to time the market. Just have a consistent program in place. If you're in the, the building wealth stage, there's going to be opportunities that come about. So, what we want to look at is what are your needs from your portfolio right now? Is it just kind of you're at that phase where you've got the house, you don't have any debt, you're just kind of saving for a future retirement. I think in, in, in situations like that, that's where working with a financial advisor and a financial planner can really add a lot of value in your life because there will be opportunities in your life where you're going to have extra assets. You're going to have extra money you can allocate to different investments. And by doing that and looking for low entry, entry points, whether it's in real estate or in the stock market can really boost those returns over the long run.

Aric: Okay.

Royal: I think the two next categories are probably the hardest to deal with. And those are those that are approaching retirement and looking at retirement here and saying, okay, do I have enough? And if I'm wanting to retire in the next year or two, how do I deal with this? How do I kind of make the right decision and make sure that my allocation is correct and my income needs are covered once I retire. That's where our financial plan analysis can really help and answer those questions and look at the right allocation for you. If you've already retired, I think that's the most critical stage right here that we're in right now is, you know, if you're in that first five years of retirement, how best do we approach that? How best do we make sure that from an income standpoint, you're covered going forward. And that that's really having that conversation, making sure that there's no hidden pitfalls there. Late stage retirement, let's say you're already in your eighties. There's probably not, not too much you need to be worried about. There's definitely some changes that can be done, but for the most part, because of the timeframe you're looking at and, you know, living in another 10, 15 years, you don't need to take as much risk. Your biggest risk, I think in that stage is really just inflation.

Aric: Hmm.

Royal: And what does inflation look like over that timeframe? Just to make sure you're not losing too much purchasing power in your income portfolio.

Aric: Makes sense. All right. So you actually named kind of two groups there that I really want to draw to your attention, because I am going to ask you to give them your contact information. Younger folks that maybe have been hesitant to get into the market, or they're just learning about it, they're just starting out their investment journey. So I want you to be able to give them some contact information. Early retirement, late stage retirement, people that are approaching that I know there's obviously with shakeup and with COVID with everything that they've gone through in this last year, it's been a little nerve wracking and we don't know what this resurgence of COVID and Delta variant, Epsilon variant, or whatever else are going to name these things. There's a lot of unknowns.

Royal: Mm-hmm.

Aric: So I know that you're totally open to these conversations and that you do this all the time. Should people be going to your website to get more information, or should they just be picking up the phone and saying, Hey, let's make an appointment.

Royal: Yeah, you can go to our website. You can schedule a, an appointment right there on the website, if you're an existing client, or if you're new and just want to sit down and look over what you've done so far and make a plan going forward, you can also just call the office or just email me directly at royal@opfa.com

Aric: All right. Well, thank you so much for your time today. Great information. It's funny that you apologized early on for what this podcast was going to be, because it was a lot of info, but I think it gives people a ton to think about. And so I'm really, really hopeful that they say, okay, there's a lot that I don't understand there I just need to give Royal a call, or his team a call, and find out what's best for me. And so that, I love these kinds of podcasts, a little bit meaty. And, uh, I think that that's good.

Royal: Good. I'm glad you stayed awake for the entire thing.

Aric: Yeah, the entire time I was here the whole time [Laughter] Thank you so much. And of course our last thank you goes to the listening audience. Thank you so much for tuning in and listening to the Life by Design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way, when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends. Again, thanks so much for listening today for everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best every day and we'll see you next time.

Outro: Thank you for listening to the Life by Design podcast, click the subscribe button below to be notified when new episodes become available. The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and is not meant to be specific investment tax or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning and advisory services offered through Oregon Pacific Financial Advisors, Inc. Securities offered through United Planners Financial Services of America, member FINRA, and SIPC. Oregon Pacific. Advisors Inc. And United Planners Financial Services are independent companies.



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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.