1. Passive index fund investing may not work as well in the future with a global aging population.

Why not? The above figure above illustrates how US, China, and Europe have already reached their peak productivity ages around 2010-2015 (i.e. working age population ratio) – and this population decline is estimated to occur over the next 20 years based on “medium variant” estimates by data from the United Nations.
How do we know what happens when the working age population ratio decreases? Because 1) GDP growth is a function of demographics, productivity, and technology and 2) We can see the difficulties that Japan is going through today:  Japan reached their peak productivity ages around 1990-1995. Twenty years later in 2015, Japan’s stock market still has yet to reach its prior all-time high in 1990, and since then Japan has suffered from bouts of recessions, low growth, deflation, disinflationary trends and now has one of the highest debt-to-GDP ratios in the word as Japan tries to stimulate their economy – all this and with only about 3% unemployment.
From https://www.bogleheads.org/forum/viewtopic.php?f=10&t=23036&start=100#p2379273japannikkei
From https://www.bogleheads.org/forum/viewtopic.php?f=10&t=23036&start=100#p2379273portfoliovals1989_2014
Because the US, China, and Europe’s demographics have passed their peak productivity age and is expected to decrease over the next 20 years 2015-2035 based on UN “medium variant” estimates, these countries may experience lower GDP growth, increased consumer saving rather than spending, and lower aggregate demand than previously – all of which may negatively affect equities in general – which may then cause problems with retirement liabilities, planning and funding based on previous historical return expectations.
Therefore, passive index fund investing over the next 20 years based on traditional methods of percent capital allocation and expected return (i.e. 60 stocks / 40 bonds) may not be the best way to build wealth nor address retirement liabilities.

2. All the other current economic and geopolitical problems today:

  • Global imbalances of current accounts
  • Decreasingly effective monetary policy stimulus
  • Fed “out of bullets” and less able to handle endogenous and exogenous shocks
  • Global trading reform and trend towards nationalism
  • Populist political group uprisings make it harder to pass needed fiscal stimulus
  • A lower working age population ratio increases entitlement liabilities owed by the state or pension while simultaneously decreasing its income from tax revenue.
  • Prolonged, low or negative interest rates by central banks causing asset price distortion and artificially high valuations based on low discount rates.
  • Low interest rates which minimizes portfolio income and causes investors to fund their retirement liabilities by taking on more risk such as either 1) increasing equity allocations which increases portfolio volatility or 2) moving out further on the bond credit/duration spectrum

There may be a better way to invest and address the above problems by focusing on risk-adjusted and cost-adjusted returns and by allocating based on asset class risk contribution – not on percent capital like most traditional investors do.

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