This article by Simon Gear first appeared on the MoneySmart website (www.moneysmart.co.za) in Dec 2011.
What a month it’s been. At a time when the world’s leaders should be closely attending to events at COP17 in Durban, Europe’s leaders have had their hands full averting a collapse of the Euro. And quite rightly too. The spider in the bedroom requires greater and more urgent action than the hungry bear on the other side of the fence. We didn’t see Monsieur Sarkhozy or Frau Merkel in Durban. Their problems are more immediate and looming than catastrophic climate change.
Meanwhile, in Durban, nothing happened. Decisions were deferred, issues were fudged and the world pushed all the boundaries for “urgent action” out to 2020 and beyond. So how does all of this affect you? This affects you enormously.
In the last 5 years, our markets have reacted like a rollercoaster to the shenanigans of first world bankers, so your return on investment from the JSE All Share, excluding fees and so on, has pretty much matched inflation at a little over 6% year on year. And for a substantial period of that time, you will have been under water. Your year to date return has been 1.25%, which is so far below this year’s inflation rate of 6.2%, it doesn’t bear thinking about.
And just as we are coming out of that greed inflicted crisis, so we see another one on the horizon. The one common thread among all the speakers at COP17 has been that long term horizon thinking is needed, from corporate CEOs and state presidents, all the way down to you and I, tending our retirement funds.
We have enjoyed a century and a half of spectacular economic growth as we have surfed a wave of cheap, fossil fuel energy. With that growth has come a simplicity in investment planning. Start early, stay calm and you’ll have enough to retire on. The rising tide of the free market will do the rest. Now, that age is coming to an end. Depending on who you speak to, oil demand will permanently outstrip supply by 2030 (OPEC) or 2056 (BP). Think about a world where not everyone can get the oil they want, at any price. We are seeing similar crunches in the supply of clean water, farmland, fertilisers and any metal you care to name.
Our leaders are faced with two scenarios. Business as usual, in which case change will come fast and suddenly, and volatility will make and destroy billions over and over again in the coming years. Or a thoughtful, structured transition to a low carbon, low resource economy, which will necessitate slower growth and more boring, but certainly not more profitable, performance. So far, they appear to be choosing the scenic route.
Regardless of which path we take, the decades that represent the second half of my retirement funding career are going to be characterised by low overall growth. Share performance alone is not going to be enough to feed me in my dotage. And the risk of a major shock occurring in the years immediately prior to my 65th birthday looks more and more likely as we transition into a more volatile future.
The point here is simple and disturbing. Don’t think that all this climate change talk is highfalutin, long range stuff with no potential to affect you personally. It will. Not only that, but the price signals we are getting from a world struggling to supply the demands of its inhabitants are already in the market. That old nub of investing, diversify for safety, has never been more true. It’s going to be a fascinating 30 years.