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Thread: Can Alternative Investing Rescue Your Retirement?

  1. Default Can Alternative Investing Rescue Your Retirement?

    It is no secret that the last decade has been a tough one in which to make money in the stock market.

    But you may be surprised to learn that this period of underperformance stretches farther back than just since the 2008 global financial crisis.

    In the 20 years up to 1999, the average real total returns from stocks (dividends plus capital gains) stood at 13.1%.

    Last year, total return on the S&P 500 was just 1.25%.

    The 15-year average annual return — roughly since the dotcom bubble burst — has fallen to 5.42%.

    That’s just over half of the roughly 10% average annual return for the S&P 500 since its inception in 1928 through 2014.

    Nor does the next 20 years look particularly encouraging.

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    After all, the U.S. stock market is trading at a long-term Cyclically Adjusted Price/Earnings Ratio (CAPE) of around 26 — far above its long-term average of 16.7.

    If you rely on income from your investments, you have it even worse.

    Conventional wisdom was that after the Fed slashed interest rates in the post-crash era, they would quickly rebound.

    Today, a new conventional wisdom is emerging that low interest rates are here to stay for a long time.

    A long period of low interest rates is not unprecedented.

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    After the Great Depression, U.S. short-term interest rates first hit 0% in 1932.

    They didn’t climb back above 1% until 1948 — an astonishing 16 years later.

    History does not repeat itself. But it does rhyme.

    If the same pattern holds this time, interest rates may not hit 1% until 2024.

    Low interest rates wreak havoc across the financial spectrum. Pension funds cannot meet defined benefit obligations. Retirement savers are punished, sentenced by loose monetary policy to a lower standard of living than they ever expected. Rising interest rates make refinancing high levels of government debt unaffordable.

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    The rule of thumb used to be to assume a 4% return on your assets in retirement. If you had a $1,000,000 pension pot, you could count on a safe income of $40,000 a year. That’s hardly a king’s ransom.

    But today, the number is closer to 2.5%.

    That implies income of $25,000 per year, pushing even those with $1 million in the bank below the poverty line.

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    Alternative investing was first made popular by Yale University’s endowment chief David Swensen starting in 1985. While top U.S. universities were early adopters of this model — and have stuck to it despite coming under pressure in the post-crash era — Swensen’s approach has been widely emulated by pension funds and sovereign wealth funds around the world.

    Swensen’s fundamental insight was to shift Yale’s standard asset allocation strategy from 60% U.S. stocks and 40% bonds to a widely diversified mix of assets.

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