An informative article on savings by Peter Switzer fleshing some issues I had raised with him during a recent interview. Here's an excerpt:
The Governor of the Reserve Bank, Glenn Stevens, made the strongest case for Australians to either get serious about how they invest and start doing a lot of homework, or get a professional specialist in investment if they want to do better than 3% real return a year!
Christopher Joye, a director at Yellow Brick Road Funds Management, and a guy who loves thinking through the pointy-headed issues most of us try to avoid, came on my Switzer program on Sky News Business channel to talk about Mr Stevens’ worrying predictions.
The key message from the RBA boss was that the returns savers realise in the future will probably be less than half of what they have earned over the last 10 to 15 years. More exactly, he said, “When [wealth does start rising again]... it is unlikely to be at 6 or 7% per year in real, per capita terms. I would guess that over the long term, something more like 3% would be nearer the mark”.
Just to make his thoughts easier to understand, he is arguing that we have become used to 10% returns but after we took out the inflation rate the real return came down to 7%. What Mr Stevens is now warning is that we might have to get used to 3-4% real returns.
In his second speech, the Governor obliged with a more detailed exposition. In particular, he presented a chart showing the after-inflation change in real, per capita household asset values over time. Joye pointed out that, “the insight he wanted to leave us with was that the 6.4% per annum growth rate earned over the 1995 to 2005 period was historically exceptional”. Over the three decades before, the average rate of household asset price appreciation in real per capita terms was closer to 3% per annum!
