What If Grantham Is Right?

by: AdvisorShares


Grantham - expectation of 1.7% annualized growth for US equities.

Times of low returns require broader investment horizons.

by Roger Nusbaum AdvisorShares ETF Strategist

There were two articles recently, both exploring the same possible outcome -- that investor returns from capital markets could be much lower in the coming years.

The first article was from the Wall Street Journal with the title How Safe Are Your Investments, Really? And the other was an interview with Jeremy Grantham in Barron's.

Included in the WSJ piece was the following:

Strip out these one-off gains and inflation, Rob Arnott recently suggested, and investors ought more realistically to expect about 1.5% a year plus dividends-meaning, in the current environment, an annual return of about 3.5% in real terms. That's a far cry from 10%.

One of the many takeaways from the Grantham interview was the reiterated expectation of 1.7% annualized growth for US equities.

The point of these articles is not to agree or disagree with the conclusions drawn, after all things have not played out as Grantham has expected very often (not an obstacle to returns), but to think about how to manage a portfolio (either for clients or as an individual) if either Arnott or Grantham turn out to be correct.

No matter what markets end up doing, advisory clients and do-it-yourselfers still have financial plans that likely require some amount of growth over time in order to have a chance of succeeding without something, such as desired lifestyle or working longer than hoped for, having to give.

While there can be no assurances of success there of course have been long stretches where market growth has been low single digits and of course there will be such periods again which creates the possibility that now is one of those times.

Times of low returns, whether that is now or not, requires broader investment horizons terms going back to asset allocation and considering asset classes that seem to be less important in a five year stretch where the S&P 500 goes up 143% but are crucial in periods like the five years going into the March 2009 low when the S&P 500 was down 33%.

This can include absolute return, foreign equities, select hedge fund replication (some of these do work well), funds that employ some sort of screening methodology to build a portfolio (these could be just as important for what they avoid as what they include), options strategies, commodities and even currencies.

Portfolio success from that five year period going into 2009 came from including these other assets, assets which have been shunned since for not keeping up with US equities. No asset class will lead forever and no asset class will lag forever and the next time domestic equities rotate out of favor clients will expect advisors to have a plan to mitigate that environment and it will likely have to include the above mentioned out of favor market segments.

Source: Google Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com.The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.