ABC Bullion chief economist Jordan Eliseo says given current economic and financial challenges, investors have good reason to be cautious.
“Considering current valuations, the unresolved economic challenges, our extreme monetary environment and the political risks that grow by the day, we wouldn’t be surprised at all if most financial markets deliver nothing in real terms over the next 10 years, with downside risks to that forecast,” Mr Eliseo said.
“Be that as it may, there is still plenty that investors and advisers can do.”
Taking a ten-year view, Mr Eliseo said it is crucial investors and financial advisers prepare for the worst.
“At the very least, investors and advisers would be prudent to prepare for the next decade as if it will be a zero-sum game. Don’t build in real return projections of 8-10 per cent per annum for ‘balanced portfolios’,” Mr Eliseo warned.
“If on the off chance this time really is different and markets successfully navigate the record debt levels we currently face, the money printing, the record low to negative interest rates, the lack of business investment and the historically high valuations, and the next 10 years are a continuation of the last 40, then you’ll be pleasantly surprised.”
Pointing to research published by Callan Associates last year that shows investors targeting 7.5 per cent per annum growth would have to take on triple the risk they would have had to take 20 years ago, Mr Eliseo said investors need to reassess their exposure.
“The more important fact investors need to be aware of is that volatility is not the only measure of risk they will need to deal with in the coming decade,” he said.
“The risk of higher inflation risk will almost certainly be a factor, as will credit risk, income risk and liquidity risk on select investments.”
While interest rates remain at historic lows today, there have been numerous examples of low interest rates quickly spiking in Australia, Mr Eliseo cautioned.
“Inflation [rose] to 15 per cent in 1915 from essentially zero in 1913, from 2 per cent in 1946 to over 10 per cent by 1948, and to 15.4 per cent in 1974 after starting the decade at just 3.4 per cent,” he said.
“It mightn’t feel like much of a threat today, but history shows that inflation dynamics can change very quickly. Food for thought if you’re considering locking money away for three-five years in a term deposit at some point during 2017.”