Today we are going to talk about the economy and how it affects us investors and what to expect in the next 20 years! The news of the week was that the FED that will keep interest rates low:
And the second very important news is that the global economy is slowing down and the growth is lowest since the financial crisis!
How does that affect our investing? Is it important at all?
Let’s start with the FED, some think the current interest rate is close to the neutral rate and that should be it.
Source: Oxford Economic
Plus, that last interest rate hikes, have slowed down economic growth in the United states but have brought it to what is expected to be normal long term.
Source: Trading Economics
What does it all mean for investors?
Well, the FED will protect you as much as it can and as in Europe, they will do whatever it takes to keep the situation calm. As long as we don’t have inflation things will be good. Plus, it is hard to have inflation when there is so much supply of everything due to the same low interest rates.
However, lower interest rates just postpone the inevitable, which is that the economy is always cyclical and after all it all boils down to productivity. Policy can influence growth in the short term, prevent crises, which also means you can’t time a crisis. Nobody knows what kind of recession will come next and when it will strike.
Postponing means that you might make 20% per year for 5 years and then lose just 20% in one year when there is a recession. The point is that even if it all looks terrible in the form of high debt, low interest rates, it might go on for a decade, or inflation might change things. Therefore, try to find both good investments and protection in case of inflation. The best investments will always be quality.
Global economic situation
On a possible global recession, and something to keep in mind also when watching the specific country growth rates, on one side we will have the slowest global growth since the financial crisis but on the other hand, global growth has been 3% compounded over the last 10 years.
The average since 2000 is probably 4%. This means that over the last 20 years, despite the global financial crisis in 2009, the global economy more than doubled. It will probably double again in the next 20 years and there will probably be one or two recessions. Keep that in mind when investing.
What did stocks do over the last 20 years? Stock doubled!
Given that the current PE ratio, in the lowest tax environment I expect we are going to see going forward.
But even if taxes go up, the difference in return will be 1% or something per year, not significant and something not to worry even if the media has already started talking about it.
I would say, passive investors should expect their money to double over the next 20 years, perhaps a bit more than that with significant ups and downs during the period.
How to invest for the long term?
If you want higher returns, from these levels I think one can easily beat the S&P 500 and other indexes because it was a hard thing to do from 1982 when the PE ratio was 7, thus the return 15%. Now that the return is around 5%, by looking at businesses that offer more, you can do that over the next 20 years. What is the difference?
$100 * 1.05^20 = $265
$100 * 1.1^20 = $672
$100 * 1.15^20 = $1636
My mission is to help those who want more than 5% per year.
The message is simple and I will never get tired of repeating it because it is so important:
Invest in value that will give you a good return over the long time, that will benefit from the fact that the global economy will probably double over the next 20 years and that gives you a margin of safety.
You might buy an airport, fertilizer stocks that we will discuss on Sunday or who knows what. But keep those things in mind. The global economy will double in the next 20 years, no matter the news. Some businesses with quadruple, some will go bust, looking long term, you have a chance to find those that will quadruple.
Long term investing is the most important advantage we have. It allows us to take advantage of the irrationalities that emerge from Wall Street’s and everyone’s focus on the short term.