Thursday, July 15, 2010

The New Normal - Low Returns

Many commentators have commented on the "New Normal", a paradigm in which returns from the two main assets classes, bonds and stocks, are poised for, perhaps years of low returns. Perhaps as low as 3-5% for a decade, in which the rich economies are nursed back to health, and before emerging economies begin to add lots of consumer demand. Add to that the sickly real estate market, and it's tough to see where decent future returns can be generated from.

This is true, particularly if your portfolio looks "normal" or average. Stuffed with a few mega cap stocks, or broad S&P 500 equity exposure, and a bit of bonds here and there, it's likely your returns will fit the New Normal profile.

To the extent that you move away from that normal profile, adding growing small cap companies at reasonable value, adding emerging economies companies of all sorts, leaning away from the popular sectors, and loading up on dividend growers, is the extent to which your portfolio won't be bedridden by the new normal.

You are only confined to the New Normal paradigm, if that's how you orient your portfolio. The easiest of all of these two components to begin swinging away from average are emerging market ETFs, and dividend-growing companies. The other suggestions take more effort and also entail more risk, but can help diversify your portfolio.

One other thing I am a firm believer in is adding some exposure to food commodities, either directly through ETFs/ETN's, or indirectly through companies operating in the farming sectors. The longer term picture is a compelling investment theme, one which has been disguised by the general economic weakness and crisis over the past two and a half years. That won't last forever and, likely, not even for that much longer on a go forward basis.

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Rick said...

Glad to see you are posting again. Can you speak more to 'dividend growing companies'? What criteria do you have in mind?

Jay Walker said...

Hi Rick,

So what I am talking about are companies that are both paying a reasonably significant dividend (today, I'd peg that as starting about 2.5%) and are furthermore growing their dividend annually by an amount more than inflation, but perhaps by less than their earnings are growing. Also, it's important to keep in mind that different sectors have ratios of dividends to earnings that shouldn't be exceeded.

Josh Peters of Morningstar has written a very nice book on this, which I recommend: The Ultimate Dividend Playbook. For something straight-forward and practical, it probably doesn't get much better than his book.

Dividends are ultimately in so many ways linked to wealth creation, that they simply cannot be ignored, except by all but the most wild-eyed, speculative, OR extraordinarily knowledgeable investors who specialize in a single sector.

Rick said...

Jay, thanks, I appreciate your expanding the topic...I will look into Peters' book!