Pessimistic on US growth in future

[asc8u]

I've recently been thinking about my finances and re-thinking my investments. I'm investing for retirement which isn't for another 20+ yrs. As I started running a bunch of online retirement calculators, I kept on coming across it asking me to input expected returns. Obviously a lot of different things could happen to the US economy over that time frame. But as I thought about prospects of my returns over the next twenty years, I'm pessimistic about growth of the US economy because of uncontrolled government spending and unsustainable debt. Along with this, I worry that inflation will be a big problem down the road.

How should I structure my portfolio to compensate for these concerns? Is increasing my holding of total market index bonds really going to help in this kind of situation? Invest more in international funds- (specifically emerging markets because I don't see Europe being in any better financial situation)? Or should I be looking to investment real estate or commodities?

Or am I just being silly? Thanks for your input.

[NYBoglehead]

I think your concerns are valid but should not affect your investment decisions. Equities should hold up and produce returns that outpace inflation over an extended period of time. Commodities are incredibly expensive to invest in and are highly volatile.

I'm sticking with my 3-fund portfolio + REITs even with my concerns about future economic growth in the US. Keep in mind something like ~48% of S&P 500 company earnings are from foreign countries as well, so between TSM and TISM you've got a lot of international exposure.

[Sidney]

If you believe that inflation is going to be much higher than everyone else expects, you might consider TIPS.

[livesoft]

I don't think your investment asset allocation should really change. However, you might want to double the amount that you are investing annually from your income.

[BigFoot48]

I don't think your investment asset allocation should really change. However, you might want to double the amount that you are investing annually from your income.

+1. That's still the most important factor still under one's control.

[nisiprius]

Those "retirement calculators" are copping out. The problem is that by asking you to make a prediction, they reinforce the idea that you can make predictions, that you are supposed to make predictions, and that investing is about making predictions.

Larry Swedroe has a column on the accuracy of expert's forecasts. The gist is right at the beginning: "There's an overwhelming body of evidence on the inability of forecasters to make accurate predictions... while it might be easy to make a living selling forecasts, it's very difficult for even the experts to make accurate forecasts."

If the experts can't make accurate forecasts, why would you think you or I could?

One of John C. Bogle's maxims is "Time is your friend. Impulse is your enemy." Investing based on your optimism or pessimism is investing on impulse. Do you really think that letting your optimism or pessimism direct your investments is sound? Oh, yes, of course we all do it, but it is something to be resisted as far as possible.

I wish I'd thought to capture the quotation, but in Future Babble: Why Expert Predictions Are Next to Worthless, and You Can Do Better, by Dan Gardner--pretty good, not as good as The Fortune Sellers, though--he makes the very cogent point that it always seems that we live in a time of unprecedented uncertainty and chaos. We always feel that there was a time in the past when things were "normal," but that today, the time is out of joint, things falls apart, the center cannot hold &c &c.

(Having lived through the 1950s, one of the things that really gets me is the crazy idea people have that it was some kind of golden age. Happy Days? The Brady Bunch? Leave It To Beaver? Let me say this loud and clear: that was television. Not real. You know what? In the 1950s, married couples did not sleep in twin beds--and bathrooms did have toilets.)

[fatmike91]

Consider the following in your asset allocation:

commodities (gold/silver). Oil.

International allocation for Stocks - Vanguard has some good funds.

International bonds - Vanguard has this now, but its dollar denominated which might not be what you want.

Real Estate (buy an income producing property)

Timberland (with Timber)

Stocks of commodity producing companies. Particularly Oil/Gas. Vanguard happens to have a great fund for this.

MLPs

maybe RIETS - Vanguard has one of these too, both US and Int'l.

Some of those may not be popular on this board.

[HomerJ]

There are a billion Chinese and Indians (and Brazilians) who are going to enter the middle-class in the next 20 years, all who will want to buy razor blades, and Coke, and washing machines.

[crowd79]

If you think inflation is going to take off over the next 20 years, then I would be loading up $10,000 per year on I-Bonds.

[BolderBoy]

Or am I just being silly? Thanks for your input.

Not being silly, but you may get some comfort in looking at various "what if" scenarios going back over 100 years. Go to firecalc.com and enter your situation. Choose several asset allocation strategies and see what have been the outcomes given various blocks of time going forward. Note that firecalc.com is not a Monte Carlo simulator.

All your fears have been fears that have been expressed by others over the 100 years as well.

I relied on firecalc's scenarios to finally pull the plug and retire.

[Jack]

I'm pessimistic about growth of the US economy because of uncontrolled government spending and unsustainable debt.

You may be pessimistic because you have been misinformed. The deficit is currently decreasing at the fastest rate in history. The interest burden of the debt is the lowest since WWII.

[zotty]

Those "retirement calculators" are copping out. The problem is that by asking you to make a prediction, they reinforce the idea that you can make predictions, that you are supposed to make predictions, and that investing is about making predictions.

Wow. yes. Fresh perspective too. I hadn't thought about it that way, but yea. exactly right.

[Call_Me_Op]

How should I structure my portfolio to compensate for these concerns? Is increasing my holding of total market index bonds really going to help in this kind of situation? Invest more in international funds- (specifically emerging markets because I don't see Europe being in any better financial situation)? Or should I be looking to investment real estate or commodities?

Or am I just being silly? Thanks for your input.

Yes, you are being silly, IMO. You seem to think you can predict the performance of the economy, or even more impressive, the performance of the US and world stock markets. Does the concept of market efficiency mean anything to you? Or do you think you are better at interpreting economic data than everyone else?

[wesleymouch]

Its best to make an asset allocation and stick to it. If you try to guess the future you might get it right but you are more likely to get it wrong. Since you are worried about the US you might want to have your equity portion reflect global markets ( look at the Vanguard Total World Stock ETF - VT for allocation ideas). Remember, in investing, you are your worst enemy and the one thing that kills is is what you know for sure. Often it turns out not to be so.

[asc8u]

Hi all.

Thanks for the responses! I definitely asked for your thoughts.
But looking back, it probably would have been more help to have re-framed my original posting to say:

Assuming that there is a high probability that the outlook for growth in the US will be anemic with higher than usual inflation for the next 10-20 years due to the
changing demographics, unfunded liabilities, uncontrolled government debt, etc, what changes would you make (if any) to your portfolio? Is there any way to hedge against
this?

I'm already saving >25% gross income, so I'm ready saving as much as I can.

Any thoughts on the responses so far - I bonds, TIPS, REITS, actual real estate, commodities?

Thanks!

[wesleymouch]

Gold is the ultimate tail risk but pays no dividends and only does well with negative interest rates. The Permanent Portfolio (google crawling road) is a kind of wealth preservation strategy but underperforms during times of prosperity. Again I would be careful in having a lot of faith in your outlook. Someone who has adopted a similar strategy is Ray Dalio with his All Weather Portolio.

[Call_Me_Op]

Most countries have large debt, unfunded liabilities, changing demographics, etc. People have to invest somewhere. These considerations do not change my AA one iota. Decide how much you want in stocks and how much in fixed income. If you want to diversify your stock holdings (which I recommend) approximate cap weighting as a starting point and then tilt as desired based upon risk/return characteristics of the equity subclasses.

[NYBoglehead]

I'm pessimistic about growth of the US economy because of uncontrolled government spending and unsustainable debt.

You may be pessimistic because you have been misinformed. The deficit is currently decreasing at the fastest rate in history. The interest burden of the debt is the lowest since WWII.

Excuse me? The CBO just released a report that we will add more than $7 trillion in additional debt over the next decade. The deficit as a share of GDP is much higher today than it was a decade ago. It is not the OP who is misinformed. You are being deceptive in your use of statistics. It will decrease this year, yes, but it is coming down from an incredibly high rate so to suggest that the fact that it is decreasing at a fast rate is a sign that everything is hunky dory is absurd. Reasonable people can disagree about how to fix our fiscal problems going forward, but to deny that there is a problem makes you the misinformed one.

[LadyGeek]

This thread has run its course and is locked. There is nothing actionable here, i.e. - no definite conclusions can be reached and it has no direct personal benefit. See: Forum Policy

UNACCEPTABLE TOPICS
Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type including oil price manipulation
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

To the OP: The answer to questions of this type will either be "it's already priced in" or "no one can predict the future." Further discussions are not productive, as it often turns into nothing but a lot of disagreement. It's why we lock these threads.

Your answer is in the first several posts of this thread.