Investors need to scale back their performance outlooks for stocks and bonds as a “3D Hurricane” of deficit, debt and demographics weigh on global markets, Research Affiliates chairman and founder Robert Arnott said Wednesday at the 2013 ETF Virtual Summit.
“There are daunting headwinds coming our way,” he said. “This is going to be an interesting storm.”
Arnott outlined an “expectations gap” among investors who are looking for stock returns of 12% a year and bond returns of 9% annually based on historical performance.
“People need to ratchet down return expectations,” he said at the ETF virtual conference Wednesday. “Low returns aren’t dangerous but expecting big returns and not saving enough is dangerous.”
Looking ahead, Arnott said more realistic returns in bonds are 4% annually, and between 4% and 6% in stocks, due to spiraling debts and deficits in developed economies, as well as unfavorable demographics as the population ages.
Inflation, which is understated by the Consumer Price Index, will also take a bite, he said.
Including unfunded liabilities such as Medicare, Arnott estimates the debt-to-GDP ratio in the U.S. is “unsustainable” at just shy of 600%.
Meanwhile, demographics are switching to a headwind to a tailwind as the proportion of senior citizens to working-age people goes to 20% the next few years, he said.
Fundamental indexing
Although investors are faced with a difficult environment, there are steps they can take to weather the storm, Arnott said.