Purgatory or hell–no matter who the president is. That’s the future investors face over the coming years given today’s low yields and high valuations, according to GMO Portfolio Manager Ben Inker.
“Either valuations will revert to historically normal levels and near-term returns will be very bad [purgatory] or valuations will remain elevated relative to history [which means]… near-term returns will be less bad but still insufficient to investors to acheive their goals [hell],” writes Inker in the firm’s latest quarterly letter.
In the long run hell is worse for investors because disappointing returns will persist for longer, according to Inker.
“The nature of the problem is different in Purgatory and Hell,” writes Inker. “In the Purgatory scenario returns for the next seven years will be inadequate but after that the world reverts to a normal pattern and the old rules apply,” writes Inker. There isn’t such a reversal in his hell scenario, as the chart below illustrates.
In the first seven years, a traditional 60/40 stock/bond $ 1 million portfolio with returns far below 5% real return would lose about 36% in the purgatory scenario and closer to 30% for the hell scenario, according to Inker’s calculation.
But after those first seven years or so, the portfolio in the purgatory scenario would stabilize while in the hell scenario it would continue to lose money.