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
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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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