Morningstar Magazine - February/March 2014 - (Page 61)

The whole world has adopted first-world levels of population growth. This takes tremendous pressure off of the world's resources and environment and enables a lot of problems to be solved more easily. Laurence Siegel for those nearing retirement. He has lectured on this topic at meetings of CFA societies throughout the world. Kaplan: William Bernstein responded to your Kaplan: Mike, you've been looking in detail article with his own piece in the Financial at demographic data and long-term trends globally, but have focused particularly on Wealth" (September/October 2013), about the Siegel and Falk both spoke about their respective work on these topics at the Morningstar Investment Conference in Toronto last year. We thought that readers of this magazine would benefit from their wisdom, especially on the practical advice that they have for investors. We brought them together for a discussion on Dec. 23. Our conversation has been edited for clarity and length. Analysts Journal, titled "The Paradox of developed countries, where we have an aging implications of your long-term forecast. He's population, people living longer, and having less optimistic about security returns. fewer children. You talk about the fundamental changes in family structure and the strains Siegel: Bernstein makes a second-order point that all this is putting on the system of that's correct, but I make a first-order point that's also correct, which is that the economy is going to continue to grow, so returns should be roughly similar to those in the past. entitlements that we've created in the Laurence B. Siegel: My main point is that outside of tropical Africa and parts of the Middle East, the population explosion is over. In other words, the whole world has adopted first-world levels of population growth. This takes tremendous pressure off of the world's resources and environment and enables a lot of problems to be solved more easily, especially environmental problems that are hard to solve when the population is growing 2% to 3% a year. His second-order point is that the returns could be lower in the future. When you go from poor to rich, you have a one-time reduction in risk that makes returns very, very high. This can happen only once, and I agree with Bernstein that it is unlikely to continue. An equity risk premium of something like 7% per year, which was the historical risk premium at the time Roger Ibbotson and Rex Sinquefield first did their work in the 1970s, is not going to happen outside of rapidly developing countries in the foreseeable future, because the rate of returns have already occurred. Even stocks in rapidly developing countries are priced competitively with other stocks elsewhere in the world, so equity owners may not get super-high returns even if the underlying economies grow quickly. Michael Falk: What it means is that, without changes to existing entitlement structures, over the long term public security returns will be lower. This doesn't mean that we can't have a big year in the stock markets, although I think 2013 may have been misleading with the way the U.S. stock market dominated the vast majority of asset classes and other markets. I also expect that the economic growth that has taken place over the past couple of centuries is going to continue at about the same rate during the rest of this century. That growth rate has averaged 1.8% a year, real, per capita. In other words, price/earnings ratios are already high, risk is already low, and interest rates are already low, so that kind of one-time huge gain is going to be hard to get again, unless you're in Bangladesh or Nigeria. Paul Kaplan: Larry, for our readers, could you briefly summarize your article "Fewer, Richer, Greener: the End of the Population Explosion and the Future for Investors." developed world. Where does that leave things for investors, especially for investors heading into retirement? Another way of looking at a growth rate in a society, other than consumption, investment, government spending, and net exports, is a simpler formula, if you will: the number of workers multiplied by a productivity factor per worker. Retirement by definition is a loss of a labor input into society. So, if we don't have a commensurate increase in productivity-remember, number of workers multiplied by productivity- then over time, growth should slow. In developed economies, we've seen productivity increases through parts of history-the modern age, that is-that have not been high global.morningstar.com/Morningstarmagazine 61 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

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