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After a quarter-century of designing and building retirement planning software, I find myself nearing my own retirement. It’s time to ponder lessons that I have learned or failed to learn.  One thing I’ve learned, the hard way, is that most financial services companies and advisors don’t especially want to change the way they serve (or under-serve) most retirement clients, or to radically change the software they do it with.  

Lesson One. For most people, retirement planning is not about investments, taxes, estate planning, or even retirement income. It’s about other stuff. It’s about where to live, what to do, what relationships to pursue or drop, and how to solidify their legacies. It’s about focusing on what matters and, surprisingly often, it isn’t money.

True, people pursue their non-financial goals in ways that are enabled or constrained by money. So if advisors weren’t engaged in the financial minutiae of retirement planning, we’d miss important details. But in most cases those details are secondary or even irrelevant. 

And we can’t work magic. Most people, when they retire, already hold all the cards they can ever play. The present value of their net worth and their probable future income streams are more or less determined. We can advise them to add risk or exercise more caution at certain times, but the success of those strategies depends on what cards their opponent (i.e., Fate) plays. There are no guarantees, just probabilities.

Lesson Two. Most of the advice our industry offers won’t help people who are already headed for financial trouble. They need to add to the value of their financial resources, relative to expected expenses. Moving money around won’t do that reliably. Often it just adds risk and strengthens Fate’s hand.

Most retirees can improve their financial situation in only two ways: By working more and/or slashing expenses. That is the unappetizing two-layer cake upon which our fancy planning serves merely as icing. The icing has value, but the millions of people who are approaching retirement need to find more cake or go on a diet.

Lesson Three. There’s no market for the kind of planning software that would address this problem.

In 1991, I began imagining software that could give people exactly what they need. It would deal with every financial issue retirees face, with particular emphasis on those with the biggest impact. It would deal with these issues in an integrated way and produce a coherent plan. The software would support complexity, but be simple to use.   

Fifteen years later, I had a prototype and took it on the road. But the big financial services companies didn’t want it. The software either required actual cooperation among their silos, or they didn’t offer all the same products and services that the software encompassed.   

Financial advisors didn’t want to deal with it either, it turned out. The software either did too much for them, they said, or it operated in unfamiliar ways, or required new workflows. I believed in it because it worked for my clients and myself. But the product’s success began and ended there. 

Employers, plan sponsors or other organizations weren’t seriously interested either. A few considered licensing it, but they were reluctant to endorse (and be held liable for) what they didn’t understand. And they didn’t understand it.

Finally, I began offering it to individuals. Many of them have liked the software, and some have renewed it year after year to keep their plans on track. But without a campaign to drive consumer awareness—an effort that only big companies like Apple can afford—I couldn’t generate enough demand.

The Bottom Line. Naturally, it bothers me that my small company reaped only thousands of dollars in sales after spending millions on product development. But my frustration runs deeper than that. Fifteen years ago, I was certain that, if given the right software, the retirement industry would embrace it, and use it to address the non-investment needs of the mass market. In other words, I believed the industry would change. Since 2007, I’ve learned why software like mine hasn’t been widely adopted. The industry, for reasons of its own, has little desire to change.   

© 2016 RIJ Publishing LLC. All rights reserved.  

In a new “Economic and Investment Outlook,” the Vanguard Investment Strategy Group assesses the future of the global economy, and its forecast—notwithstanding yesterday’s drop in the Dow Jones Average—isn’t all bad.

Given the “structurally lower population growth” and removal of “the consumer-debt-fueled boost to growth between 1980 and the global financial crisis,” Vanguard’s team of economists considers the anticipated 2% growth rate for the U.S. to be about as good as can be expected.

You can find a copy of the full report here. The main points are summarized below: 

Global economy: Structural convergence

World economic growth will remain frustratingly fragile. As in past versions of Vanguard’s Economic and Investment Outlooks, we view a world not in secular stagnation but, rather, in the midst of structural deceleration. Vanguard’s non-consensus view is that the global economy will ultimately converge over time toward a more balanced, unlevered, and healthier equilibrium, once the debt-deleveraging cycle in the global private sector is complete.

Most significantly, the high-growth “Goldilocks” era enjoyed by many emerging markets over the past 15 years is over. We anticipate “sustained fragility” for global trade and manufacturing, given China’s ongoing rebalancing and until structural, business-model adjustment occurs across emerging markets. We do not anticipate a Chinese recession in the near term, but China’s investment slowdown represents the greatest downside risk to the global economy.

The growth outlook for developed markets, on the other hand, remains modest, but steady. As a result, the developed economies of the United States and Europe should contribute their highest relative percentage to global growth in nearly two decades. Now at full employment, the U.S. economy is unlikely to accelerate in 2016, yet is on course to experience its longest expansion in nearly a century, underscoring our continuing view of its resiliency.

Indeed, our long-held estimate of 2% U.S. trend growth is neither “new” nor “subpar” when one both accounts for structurally lower population growth and removes the consumer-debt-fueled boost to growth between 1980 and the global financial crisis that began in 2007. Our interpretation fully explains the persistent drop in U.S. unemployment despite below-average economic growth.

Inflation: Secular deflationary bias waning

As we have discussed in past outlooks, policymakers are likely to continue struggling to achieve 2% core inflation over the medium term. As of December 2015, however, some of the most pernicious deflationary forces (commodity prices, labor “slack”) are beginning to moderate cyclically. Inflation trends in the developed markets should firm, and even begin to turn, in 2016. That said, achieving more than 2% core inflation across developed markets could take several years and will ultimately require a more vibrant global rebound.

Monetary policy and interest rates: A ‘dovish tightening’ by a lonely Fed

Convergence in global growth dynamics will continue to necessitate and generate divergence in policy responses.

The U.S. Federal Reserve is likely to pursue a “dovish tightening” cycle that removes some of the unprecedented accommodation exercised due to the “exigent circumstances” of the global financial crisis. In our view, there is a high likelihood of an extended pause in interest rates at, say, 1%, that opens the door for balance-sheet normalization and leaves the inflation-adjusted federal funds rate negative through 2017.

Elsewhere, further monetary stimulus is highly likely. The European Central Bank (ECB) and Bank of Japan (BoJ) are both likely to pursue additional quantitative easing and, as we noted in our 2015 outlook, are unlikely to raise rates this decade. This view is another potential factor that could result in a pause for the federal funds rate this business cycle.

Chinese policymakers have arguably the most difficult task of engineering a “soft landing” by lowering real borrowing costs and the real exchange rate without accelerating capital outflows. The margin of error is fairly slim, and policymakers should aggressively stimulate the economy this year in an attempt to stabilize below-target growth.

Investment outlook: Still conservative

Vanguard’s outlook for global stocks and bonds remains the most guarded since 2006, given fairly high equity valuations and the low-interest-rate environment. We continue to view the global low-rate environment as secular, not cyclical.

Bonds. The return outlook for fixed income remains positive, yet muted. In line with our past outlooks, our long-term estimate of the equilibrium federal funds rate remains anchored near 2.5% and below that of the Fed’s “dot plots.” As a result, our “fair value” estimate for the benchmark 10-year U.S. Treasury yield still resides at about 2.5%, even with a Fed liftoff. As we stated in our 2015 outlook, even in a rising-rate environment, duration tilts are not without risks, given global inflation dynamics and our expectations for monetary policy.

Stocks. After several years of suggesting that low economic growth need not equate with poor equity returns, our medium-run outlook for global equities remains guarded, in the 6%–8% range. That said, our long-term outlook is not bearish and can even be viewed as constructive when adjusted for the low-rate environment. Our long-standing concern over “froth” in certain past high-performing segments of the capital markets has been marginally tempered by the general relative underperformance of those market segments in 2015.

Asset allocation. Going forward, the global crosscurrents of not-cheap valuations, structural deceleration, and the exiting from or insufficiency of near-0% short-term rates imply that the investment environment is likely to be more challenging and volatile. Even so, Vanguard firmly believes that the principles of portfolio construction remain unchanged, given the expected risk–return trade-off among asset classes. Investors with an appropriate level of discipline, diversification, and patience are likely to be rewarded over the next decade with fair inflation-adjusted returns.

© 2015 The Vanguard Group, Inc.

In my 2014 end-of-year commentary, I forecast a 19% loss in 2015 for U.S. stocks, as measured by the S&P 500, when in fact the S&P actually earned a positive 1.4% return, so I was wrong. 2015 was disappointing, but not as bad as I thought it would be. The total U.S. stock market was down 1%. Other asset classes weren’t so lucky, especially precious metals and commodities. 

My fickle finger of gloom was misdirected in 2015; it should have pointed at other asset classes. But I’m repeating my forecast for a 19% loss in 2016, in stark contrast to Wall Street’s 7% to 11% gain forecast. U.S. stock market fundamentals have deteriorated with lower dividend yields and higher price/earnings ratios, especially if you consider the effects of stock buybacks.

We’re entering 2016 with a frothy and expensive stock market that begs to be humbled. I don’t think it can dodge a bullet two years in a row. [This is an abbreviated version of the Surz report. You can find the full version, including all of the charts, here.]

Winners and losers in 2015 and the 5 years ending 2015

U.S. stocks. As in 2014, large-cap stocks led the way in 2015, with large-cap growth stocks performing best, earning 10.5%. By contrast, small-cap growth companies lost 15%. The S&P 500 returned 1.4%, exceeding the total market’s 1% loss. On the sector front, healthcare fared best, earning 7%. By contrast, energy stocks lost 25.5%, and materials lost 14%. In a repeat of 2014, it was another bad year for infrastructure companies, and a good year for technology, both IT and medical.

The collapse of energy stocks this year and last year has been the big story. Energy stocks plummeted in the second half of 2014 and continued to decline in 2015 as oil prices crashed, due in large part to increased supply from fracking operations in the U.S. Crude oil ended 2015 at $38 per barrel, which is less than the cost of exploration in several countries like Brazil and the UK. Consequently oilrigs have been shut down as have pricier shale regions including Eagle Ford in Texas and Bakken in North Dakota.

OPEC is employing a strategy of putting oil producers out of business, at least temporarily. OPEC is increasing oil supply in the face of decreasing prices, a strategy that may be good for consumers in the short run, but can’t be good in the long run. Lower prices increase consumption, so we use more of a commodity that has a limited supply. The day that this supply is used up has drawn closer, as has the day that energy prices rebound.

Larger companies have performed best over the past five years, especially large cap growth stocks. Healthcare and consumer discretionary companies have performed best. Infrastructure stocks – materials and energy – have performed worst. 

Foreign stocks. Looking outside the U.S., foreign markets earned 1%% in 2015, exceeding the U.S. stock market’s 1% loss and exceeding EAFE’s 0.5% return because, unlike the U.S., smaller companies performed best. Japan and Europe have seesawed over the years, thriving in 2013, suffering in 2014, and winning again this year. Canada was the worst performing country with a 20% (in $US) loss.

Over the past five years, foreign market returns of 5% per year have lagged the U.S.’s 11% per year appreciation, but exceeded EAFE’s 4% return. Europe and Japan have had the best performance, earning 8% per year. By contrast, Latin American markets have lost 3% per year. Unlike the U.S., value stocks have fared best over the past 5 years, earning twice as much as growth stocks, 7.5% versus 3.5% for growth.

The future: Winners and losers forecast for 2016

In “Searching for Alpha in Heat Maps,” published in early April 2013, I showed how heat maps could be used to profit from momentum effects. I then published my forecasts each quarter and momentum effects “worked,” with winners continuing to win and losers continuing to lose.

So now I’ll offer forecasts for the first quarter of 2016 using heat maps. A heat map shows shades of green for “good,” which in this case is good performance relative to the total market. By contrast, shades of red are bad, indicating underperformance. Yellow is neutral.

The table below is the U.S. heat map for the year ending December 31, 2015. We see that the best performing market segments are mostly in the healthcare sector and the large cap growth style. These would be the stocks to bet on if you want to make a momentum bet. Of course you could make a contrarian bet that these sectors will not do well.

As for underperforming segments, energy and materials stocks are the place to look, especially smaller companies in these sectors. Many quantitative managers employ momentum in their models, buying the “green” and selling the “red.” Fundamental managers use heat maps as clues to segments of the market that are worth exploring, for both momentum and reversal potential.

Moving outside the U.S., the healthcare sector and the small cap growth style thrived in 2015, while energy stocks in all countries and styles have suffered, as has Canada.

The Past: The 90-year history of the U.S. capital markets

In forecasting the future, it helps to understand the past. Those who are unaware of the mistakes of the past are more likely to repeat them. In the final section of this report, I provide a longer-term 90-year history of stocks, bonds, T-bills and inflation.

There are many lessons to be learned from this history. Here are a few:

• T-bills paid less than inflation in 2015, earning 0.1% in a 1.3% inflationary environment. We paid the government to use their mattress, as we have for the past ten years, with a 1.21% return in a 1.85% inflationary environment.
• Bonds were more “efficient,” delivering more returns per unit of risk than stocks in the first 45 years, but they have been about as efficient in the most recent 45 years. The Sharpe ratio for bonds is 0.48 versus 0.34 for stocks in the first 45 years, but the Sharpe ratio for both is the about the same in the more recent 45 years. Both stocks and bonds have returned about 0.32% per unit of risk.
• Average inflation in the past 45 years has been more than twice that of the previous 45 years: 1.83% in 1926-1970 versus 4.09% in 1971-2015.
• Bonds returned 2% above inflation in the first 45 years, and that doubled to above 4% in the past 45 years.
• Stock market volatility was much higher in the 20-year period 1926-1945 than it has been since. Volatility subsided from 20-35% down to 15% in the most recent 70 years.
• By contrast, bond markets have become more volatile, more than doubling in the most recent 45 years to 9.23%, versus 4.52% in the first 45 years.

© 2016 PPCA Inc.