Don’t Worry About Investment Return – Worry About Return of Your Money
Most investors worry about how much of a return they’re going to see on their investment. That’s natural.
The entire point of investing is to grow your wealth and safeguard your future.
However, Bill Gross has pointed out that investors this year might need to worry about something very different. Rather than stressing out about their investment return, he urges investors to worry about whether or not they’ll even get their money back.
The Monopoly Correlation with Investment Return
Gross is known for making bold statements and attempting to open the eyes of the everyday investor to the realities of the market.
In his June 2016 note, he likens the economy to the game of Monopoly. “If only Fed governors and presidents understood a little bit more about Monopoly,” he said, “and a tad less about outdated historical models such as the Taylor Rule and the Phillips Curve, then our economy and its future prospects might be a little better off.”
What Gross is referencing is the fact that investors today should actually never expect to see a decent investment return, at least not with traditional investment vehicles.
His June 2016 note explored the reasons for this, including the fact that the market was approaching its ultimate high, and after that point, there is nowhere to go but downward.We have yet to hit that crucial apex, but it’s coming, looming on the horizon like a dark cloud everyone is intent on ignoring.
Savvy investors will not only notice the catastrophe waiting in the wings, but will plan for it, allowing them to weather the storm in relative peace and comfort.
Gross manages to include both ongoing globalization trends as well as decentralization trends like Brexit and the growing populist movement around the world into his analogy.
So, what is the driving force behind his predictions of destabilization and a lack of investment return?
Really, it boils down to the lack of new credit, and new infusions of money into the economy. He carries the Monopoly analogy quite a long way, and it does seem to fit the situation we’re beginning to see.
“All of these events,” he says, referencing everything from Brexit to the continued robotization of the workforce and the reduction of US GDP from 5% to 2%, “are but properties on a larger economic landscape best typified by a Monopoly board. In that game, capitalists travel around the board, buying up properties, paying rent and importantly, passing ‘Go’ and collecting $200 each and every time. And it’s the $200 of cash (which in the economy scheme of things represents new credit) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player bankruptcies become more probable.”
Where Is the New Credit?
So, this begs the question – where is the new credit?
What’s happened to the new wealth created by central banks?
It’s stuck in capital markets and other liquidity traps. Banks aren’t doing much in the way of offering new loans, or putting money into the economy in any measurable way. This causes economic activity to slowly come to a stop.
We’re now seeing the earliest beginnings of this trend, and it should alarm investors. In fact, it should cause you to worry that you might not even make back the money you’ve put into the market, much less see any investment return.
To put this in a more easily digestible format, consider the fact that US credit growth in 2000 was at 9%. During the Great Recession, that slipped down to 2%. In the years that have followed, we’ve only made it back to 3.5% growth and extrapolating the current trends shows that in just a few short years, credit growth might be slower than it was during 2007-2008 at the height of the recession.
Gross goes on to qualify that while the growth of credit and the supply of money in the economy is not the only factor that affects GDP, the speed of that money into the economy does matter a great deal.
If it moves too slowly, then players will eventually fall, and “bankruptcies” will erupt.
Eventually, no one sees an investment return or even makes back their money.
Bill Gross sums up his thought by saying, “Worry for now about a return of your money, not a return on it. Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.”
What to Do to Combat This Trend?
So, what is an investor to do?Is your only option to pull all of your money out of the market and bury it in Mason jars in your back yard? While that might be a solution for some, there are other options out there.
Is your only option to pull all of your money out of the market and bury it in Mason jars in your back yard? While that might be a solution for some, there are other options out there.
While that might be a solution for some, there are other options out there.
First, understand that the best path forward is to forgo conventional stock investing completely. As the market continues to approach peak valuation, the time required to see a return on your investment dwindles.
In fact, we may now be beyond the point at which you’ll see any return at all, and might not even make back the investment capital you put forward. In this instance, the best choice is to eschew stocks and instead choose bonds.
The stock market isn’t going to evaporate overnight. Traditional investing isn’t going to go away or melt down completely.
However, many players in this great economic game may find that their investments are not only not paying off, but that they’re eating away at their financial independence, and that is something that investing should never do.
In his October 2016 note, Gross underlines: “At some point investors — leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives.”
It should be a safeguard for your financial health and a guarantee of a certain quality of life in the future, not a weight dragging you down.
Savvy investors will understand that putting their money into investment vehicles with slower growth but lower risk can provide them with the return they need, and ensure that their investment capital remains intact.