In his most recent quarterly shareholder letter, hedge fund manager Jeremy Grantham made headlines saying the era of 3% growth is “gone forever.” He cited data on population growth, employment and productivity trends that all but assure that a new world of 1% growth is inescapable, just as it has been for Japan, whose aging population also reduced economic output two decades earlier in the former colossus.
Grantham did not get into the investment implications of slower growth —he said that would come in his next letter—but I will venture to say that a rapidly decelerating economy weighed down by massive debt will be a downer for stocks.
Just look at a historical chart of Japan’s Nikkei 225 index. Any skiers out there? The last four decades look like Mount Fuji, with an almost straight downward slope following the market’s1989 peak.
We can live on 1% growth (and anyway have no choice). As Research Affiliates head of investment management Christopher Brightman noted in a recent letter to clients: “1% real growth is still growth. It’s a joy to behold, if our expectations are anchored on zero, as was the case throughout human history before the industrial revolution.”
So what did people do to pursue their financial objectives before the industrial revolution? They scrimped and saved. (And, for the sake of historical accuracy, they died rather than retired, retirement being a post-World War II innovation.)
But that of course is not the relevant comparison. Your clients are not pre-industrial serfs who lived in the age of 0% growth. Your clients are historically unique. They grew up in a world of 3% growth and are entering an unfamiliar world of 1% growth, mostly unawares.
There may be no generation that ever needed an advisor as much as today’s hard-pressed Americans. In the age of 3%, people needed advisors to keep them from self-destructing. All too many fruitlessly chased returns. In the age of 0%, there were no returns, and besides, having an advisor would be uneconomic for anyone outside the aristocracy.
In today’s slow-growth environment, margins are likely to narrow quite a bit. After all, 1% is closer to zero than it is to 3%. So what is the task of the advisor? To help their clients scrimp and save, with any spurt of portfolio growth being “a joy to behold.”
Specifically, advisors can help their clients with the basics of paring down debt, refinancing long-term debt on more favorable terms and reducing spending—all in order to increase their rate of saving. In a 1% growth economy, higher savings will be critical if there is to be any chance at salvaging the modern concept of “retirement.” By anchoring expectations at zero, as Brightman suggests, advisors will have done much to deliver financial security to a population still harboring illusions of the old normal.
Smart advisors will doubtless uncover pockets of growth—whether in emerging markets or the soundest U.S. businesses. But the shift in emphasis from passive investing to active saving is overdue. Getting rich slowly through hard work and financial discipline was always a more reliable way to wealth anyway.