Indexing Will Fail Investors in Coming Decade

A recent article in MarketWatch argues that equity investors are facing market conditions which will “no longer deliver acceptable returns”, even for index investors. “A fundamentally different, outside-the-box approach to investing will be required,” it says.

Here are the reasons outlined, which “have the potential to create conditions resembling a perfect storm”:

  1. The current “debt super-cycle” is ending—servicing higher levels of debt ties up increasing amounts of capital which, the article argues, could otherwise be used to enhance productivity.
  2. The retirement of the baby boomer generation will have huge global implications with respect to productivity.
  3. The middle class is seeing declining spending power. “Low- or no real wage growth negatively affects aggregate demand and partially explains why GDP growth is so low everywhere.”
  4. “The rise of the East”: Asia’s growth, the article says, could affect the global economy positively, “but the jury is still out.”
  5. The death of fossil fuels—electrification of heating and transportation is being pursued by governments across the globe, which will lead to an eventual phase-out of coal and natural gas. Also, many European governments “are on the warpath against plastic products,” which will reduce the demand for oil.
  6. Mean reversion of wealth: The article argues that asset price growth has outpaced that of GDP for years, a situation not sustainable over the long term.

The following suggestions are made regarding factors to consider when constructing investment portfolios:

  • Invest in value instead of growth stocks;
  • Seek income from stocks rather than bonds;
  • Invest in water. Water scarcity, it says, is being taken seriously in only a few countries (North Africa, the Middle East, and Australia) but the “reality is different.”
  • Invest in illiquidity. Since the financial crisis, the article says, many investors have demanded instant access to their capital, driving up returns on investment strategies where capital is locked up for years.”