January 7, 2010 / 3:27 PM / 8 years ago

Dire decade heightens savers' investment anxiety

6 Min Read

LONDON (Reuters) - The worst investment decade since World War Two bids a sorry farewell this week to savers approaching retirement in droves.

Aside from the relief of 2009's equity recovery, the last ten years have delivered two devastating stock market crashes, a spectacular credit boom and bust and persistently low yields from unusually buoyant government bonds.

Since December 1999, a typical 60/40 equity/bond portfolio in the United States would have recorded the lowest average annual returns since the 1940s at about 1.4 percent. Adjusted for inflation, it was the worst decade since the 1970s.

Wall St's S&P500 index is set to record its first negative decade -- down 24.6 percent since 1999. It remains in the red to the tune of 9.8 percent even when dividends are reinvested.

And if you happened to be an unhedged investor from overseas, you suffered a double whammy. The dollar lost some 23 percent against a basket of the most traded world currencies.

Starting the clock at the peak of the dot.com boom probably skews the numbers. But a wider problem of ebbing returns is reflected well beyond the United States and beyond equities.

Benchmark bourses in France, Italy, Ireland, Netherlands, Finland, Greece and Iceland have all underperformed the S&P500 in local currency terms, notching up losses of between 35 and 70 percent over the decade.

And accounting firm KPMG reckons the noughts could become a "lost decade" for pensions in Britain. A typical UK pension fund strategy would since 1999 have bolstered assets by just 2.25 percent a year, before costs -- less than half the 4.7 percent possible if the assets been kept in bank deposits.

The "pension pot purchasing power" fell sharply too. A 100,000 pound ($160,000) fund would now buy an annuity of less than 7,000 pounds compared with around 9,000 pounds in 2000.

"Over the next decade we predict that more and more people will retire relying on their capital, property or other assets rather than a pension scheme," said Mike Smedley, pensions partner at KPMG in the UK. "This could be a very risky strategy as these people are likely to have a very difficult job running down their capital at the right pace."

So What Did Work?

Safety triumphed in the noughts. Gold almost quadrupled in price. Ten-year U.S. Treasury bonds returned over 80 percent.

This was perhaps unsurprising in a decade of two major equity crashes, attacks on the United States and two subsequent U.S.-led wars, teetering banking and financial systems, and unprecedented policies of reflation and money printing.

There were some diamonds in the equity rough.

As ever, those willing to absorb risk and some wild swings in emerging markets would have been rewarded.

Ukraine's PFTS bourse was the best performing market of the decade with gains of 900 percent in dollar terms or 1400 percent in hyrvnia. Russia's RTS gained almost 700 percent and European Union member Romania was up almost sixfold in dollar terms.

And even within the United States, you could have played some blistering sectors. According to market researchers IBISWorld, the best performing industry of the decade -- based on astronomical cumulative revenue growth of 179,035.8 percent -- was VoIP, or Voice Over the Internet Protocol providers.

Like an alternative narrative of the decade, the top ten included "Internet Search Engines", "Online Dating" firms and "Tank and Armoured Vehicle Manufacturers".

On the flipside, any industry competing with China was a loser. Clothing manufacturers litter the bottom 10 industries. Financial firms snared by the credit maelstrom join them.

Bonds and Retirement

Yet for savers without the time or expertise to be stock pickers or for those too risk averse to stick all their eggs in one basket, the investment climate has been dour.

Even Harvard or Yale endowment funds -- for years the paragons of broadly diversified portfolios of stock, bonds, real estate and alternatives -- were eventually felled this decade by the stress-driven correlations of the past two years.

Harvard said its fund's assets fell almost 30 percent to $26 billion in the year to June. And while it still outperformed conventional stock/bond portfolios, its annualized returns have been have falling to 6.2 percent over five years from 8.9 percent over 10 years and 11.7 over 20 years.

The picture of falling returns is a stark one for increasingly risk-wary, aging populations that are rapidly approaching or contemplating retirement and living longer.

And yet, one reason government bond yields have been so depressed for the past decade is precisely because the outsize baby boomer population cohort is shifting to "safer" securities, fearful of an increasingly lottery-like equity rollercoaster.

Watson Wyatt estimate the share of bonds in the world's biggest pension systems nearly doubled to 40 percent since 1998.

The quid pro quo has been lower returns. The average of 10-year Treasury bond yields this decade has fallen two full percentage points to just 4.5 percent since 1999.

The early test of the next investment decade will be whether that herding to debt has gone as far as it can and whether the feeble government yields still on offer will force investors to return to equity or emerging markets after the nasty noughts.

It may even be that the deluge of new government debt required to fund recent economic bailouts has come at the right time.

Editing by Ruth Pitchford

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