If you have a 401 (k) and are nervous about it, you probably don't want to look at the table above.
Even by the standards of GMO, the super-cautious wealth management firm in Boston best known for its famous co-founder, Jeremy Grantham, it's terrifying.
It shows the worst medium-term projections for pretty much all of the assets most of us hold in our retirement accounts. US stocks of big companies like the S&P 500
? U.S. small company stocks like the Russell 2000
? International stocks? US bonds, foreign bonds, inflation-linked bonds? GMO thinks if you buy them now and hold them for the next seven or so years, they will all – all – lose money in real purchasing power.
For some of these mainstream investments, the projected losses are huge. These 8% and 8.5% annual losses for US large caps and small caps? When they happen, they mean your SPDR S&P 500 ETF
and Vanguard S&P 500 Trust
and Schwab US small cap ETF
lose roughly half their inflation-adjusted value by 2028.
I've been following GMO's predictions for almost 20 years. I've never seen one that bad, and I've seen some that were really bad – like the ones they did in 2000 and 2007, right before the two big crashes.
At certain moments, market followers tend to roll their eyes when someone mentions the latest dire GMO predictions. "These guys have been wrong for years," say skeptics. For example, they point out that 10 years ago GMOs predicted that emerging markets would likely do really well and US stocks would do badly. Instead, the opposite happened.
Go to an online chat room like Bogleheads and you can find lots of skeptics.
But it's not that simple. GMO was one of the few companies that predicted the 2000-2003 and 2007-2009 crashes. And every time people laughed. The online chat rooms were different – Yahoo and Raging Bull 20 years ago – but the sound was the same.
In any case, the warnings GMO made in the late 1990s were remarkably accurate. It ranked the top 10 asset classes based on future investment performance and pretty much aligned them. "The probability that this forecast was spot on was less than one in 500,000," calculated The Economist magazine.
Worst of the 10? The S&P 500.
I also remember that in the summer of 2007, when markets were booming, Grantham warned that at least one major Wall Street bank would go bust in the next two years. Back then, people thought he was finally out of joint. This is probably what they thought of Bear Stearns (d. 2008) and Lehman Brothers (d. 2008).
Oh, and he got aggressively bullish on stocks in the depths of the 2007-2009 global financial crisis. As he wrote back then: When stocks are cheap and you don't buy them and then go up, you don't just look like an idiot, you are an idiot.
GMO is getting so much criticism right now from folks in the anti-social media that, in an unusual move, it has just released a robust defense of its predictions. I could have told them that defending yourself against people on anti-social media is a waste of time. Twitter, as WOPR might say, is like Tic-Tac-Toe and Global Thermonuclear War: the only way to win is not to play.
But in an unsigned notice from the company's asset allocation team – chaired by company honoree Ben Inker – GMO points out that in some ways the S&P 500 may be even more overvalued today than it was in 1999-2000.
What do we ordinary investors think of this? History shows that the time when we humans like GMO need to listen the most is exactly when everyone stopped listening.
In addition, if we reject these types of warnings, we must be careful not to double count. By definition, the more you pay for stocks, the lower your future long-term returns must be. When the stock market goes through the roof, we should be more cautious, not less cautious, about the future.
As a longer term investor in retirement planning, GMO's warnings don't make me want to sell everything. But they remind me to review my risks. If I couldn't stand a 50% decline in the market over the next 5-10 years, then I probably own too many stocks. And most importantly, they remind me to diversify.
GMO believes there are investments that offer much better prospects than the S&P 500. H. cheaper, typically older, stocks in emerging markets from China to Brazil, small business stocks in Japan, and general value and quality stocks everywhere. There are good opportunities for diversification for those betting solely on US stocks.
I wouldn't let my hat down in the face of these predictions. But I wouldn't ignore them either.