Rethinking Investment

In my last post, made a few months ago now, I argued in favour of passive index-based funds when choosing a KiwiSaver provider (i.e. a fund that tries to track a particular sub-market rather than one where people actively trade to maximise returns). This was on the grounds that they not only generate a better return when fees are taken into account, but that they often do better than the actively managed accounts on gross return as well. I’m still happy with that analysis.

However, I also argued that when investing for the long term the best returns have tended to come from investments in growth funds such as stock market index trackers rather than the more predictable cash and bonds; the idea being that while individual stocks may be risky the overall market has grown steadily.

Obviously this theory relies on the idea of the ever-growing economy caused by increasing production and consumption. I like to believe that this is possible, that the world will keep getting richer. The belief comforts me while I read books that describe the end of life as we know it through the effects of climate change, peak oil, or whatever other catastrophe looks good on the dustjacket.

I don’t know which outcome will come to pass in my lifetime or even which of them is the most likely. But I think there’s enough chance that I’ll live in a civilisation that will muddle through and growth-based funds will do well enough that they’re still the best choice. You could say that they track the success or otherwise of our civilisation.

However, at the moment I’ve chosen a cash-generating cash and bond index fund because I do think we’re in for a recession in the next few years. In this case I would expect stock market returns to fall in value or at least lag behind the high interest rates that are currently available. Why buy into it now when you could wait a few years?

I’ll tell you whether I’m right or not after it happens.