Are you the type of person that occasionally likes to gamble? Do you ever go to the casino and play slots or table games, hoping to score a big hit? How about poker, a game in which skill plays a big part, as well as luck. Or perhaps you like to bet on horse racing?
Going to the casino for a night out can be fun, but only a fool would willingly gamble with all their life savings. Even if you are not someone who likes to gamble at all, however, you may be unwittingly doing just that, gambling with all of your life savings, by betting on your future.
Over the last 100 years or so, the stock market has grown at a compound annual rate of 9.55%. Real economic growth hasn’t been so bad, either. Things in more recent history, however, have been a bit different.
Economic growth in the developed western world is slowing down, and the stock market has basically moved sideways over the last ten years. Bull markets and bear markets are a natural part of the markets, but there may be more reasons to be concerned about the future.
I have talked about how we can look forward to a future of prosperity and long lifespans, but we have not yet arrived at that point. In the meantime, there are real issues which could pose as obstacles along the way.
Potential pitfalls
The first main obstacle is the growing exodus of older people from the workforce, as they retire. While this exodus opens up opportunities for younger people, it also increases the real resources required to support these retirees. Some countries are even in danger of becoming “upside down”; they will eventually end up with more retirees than workers!
With conventional retirement planning, people begin drawing down on their nest eggs as they leave the work force. With time, they will eventually consume most of their capital. This selling activity will place downward pressure on asset valuations, which may have real impacts on the growth you expect to achieve in your portfolio. Were you looking for a compound annual growth rate of 8% to 10% in your market portfolio? You might have to get used to less than that for a while. Other issues may also rear their ugly head along the way, such as sovereign currency risk and currency default.
This isn’t the only way we bet on the future, of course, and the path we take in life, our career, education, and our choices, will all influence our outcome.
The way forward
Thankfully, society and the economy are not static nor fixed. Productivity and efficiency increase with each and every passing year, allowing more to be produced with less. This will increase the amount of real goods available to the economy, thus allowing an increasing number of people to leave the workforce without lowering overall standards of living. In the long run, everyone’s wealth and standards of living will increase greatly.
Another trend is that a growing number of people won’t simply retire and live off their wealth, but they will instead take up new lines of work, perhaps ones in which they can be more creative, now that they are no longer constrained by the requirements of corporate life.
The catch to this increasing productivity is that as living standards rise and as the middle class in India and China grow and prosper, the pressures on our limited resources increase. In order to support increasing living standards and stave off decline, we’ll have to get cracking on improving clean energy production and manufacturing processes. Nanotechnology is going to play a big role in this, and in fact, I believe it is the door which leads to a successful future for us.
How to really bet on the future
Just for fun, you can try your hand at the prediction markets, and see how well you do!
So, what contingency plans do you have in place, should growth rates not be quite what you expect? Do you believe in the “Fallout” model of growth; that we’ll hit a wall, and that war and famine will be a result, or do you believe in the “Kurzweil” model of growth, which predicts a future of increasing automation, miniaturization, and clean production via nanotechnology, for all?
I don’t really have a contingency plan for my savings, I just save as much as I can and hope for the best. I am starting to invest in my dividend stocks so at least some is some revenue in down times. I do recognize dividends can be cut, but at least it is something, hopefully for awhile.
I used to work in IT, and most of our jobs were in the process of being outsourced overseas when I left. I fear that is going to be the norm more and more. It is almost like we need a new ‘Industrial Revolution’ to get our nation kick-started again, and maybe the areas you mentioned will be just the thing to do it.
You know, I work in IT today, and I can see danger for a lot of large organizations that are unwilling or unable to adapt to change. I sometimes get nervous when I think of all the educated people in China and India that are just waiting to grab our jobs. I also see a lot of promise and opportunities for more adaptable and nimble firms that are able to capitalize on these changes.
As hard as governments may try, consumption on other people’s production cannot last forever, so the free ride is slowly coming to an end. We gotta remember that it’s not a zero-sum game, though. New opportunities open all the time, if we are willing to embrace them instead of trying to hold on to the old ways. I am also trying to keep my current consumption down so that I can save and invest more, and at the same time, I’m trying to educate myself in all those areas where I am sorely lacking, so I can be better prepared as the shift comes.
Kevin,
The only gamble i am willing to take is this: the economy will not crash and burn, we will not go through the fall out. It’s kind of a calculated risk after looking back to the last 100 years. The market can correct all it wants, in the end things will get back on track again. Which is why i always buy when the markets are bloody, especially dividend paying stocks since you get paid to wait…I will be posting about my one and only gamble next week.
Mich
In the long run, the markets usually do recover, though I do recall a certain famous someone also once said that “in the long run, we are all dead.” 😉
How is the mortgage disaster, and free fall in home values, likely to be remedied if individuals can not obtain a new job? There are millions of individuals that already lost their houses to foreclosure and many more will unless the United States starts generating something more then debt. It’s time to change the trade policies with China. For crying out loud, our greatest trade partner is communist!