Population Growth

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canoe
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Population Growth

Post by canoe »

I've been thinking about the extent to which the solid, "surefire returns above inflation" investments normal people (and I) target (index funds, real estate) only really work because of increasing population (economic growth more from population growth than innovation, more people vying for same quantity of land).

The population will peak in 2100 supposedly, but the growth rate is falling all the while.

When do index funds and real estate stop being good default investments?

loutfard
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Re: Population Growth

Post by loutfard »

There is no answer to your question. Accurately forecasting the future performance of these asset categories is hellshly difficult, and certainly out of reach for you and me.

Asking which assets are likely to beat inflation might be more useful a question. That might lead you towards index investing anyway.

jacob
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Re: Population Growth

Post by jacob »

canoe wrote:
Mon Feb 27, 2023 9:13 pm
When do index funds and real estate stop being good default investments?
That's technically a loaded question. Different answers vis-a-vis CA (Canada, not California) and US already.

Lets reframe it...

A very good way to frame it is whether your framework is stationary. Stationarity comes with different timescales. For example, fashionable clothing is stationary for a season or two after which it becomes uncool because the distribution drifted/changed.

This means the first order of the day is to understand the timescale. Today? 2023? 2020s? My working life? 21st century? ...

The second order is to understand how many investors, that is people with money to invest---this is a very minor fraction of humanity---are committed to that framework at that timescale. This is why fantastic investments work until they suddenly don't. E.g. dotcom stocks. Pro-tip: People are more committed if the timescale is relevant to them. What timescale to humans use? How far do humans think ahead whether deliberately or not? (Hint: mostly not)

Frameworks and timescales. Understand this first.

The third thing/order to understand is how people may change their framework because their reality somehow forces them to. This is more subtle. People selling out because they lost their job ... or because they retired. This is probably where SPY and VTSAX live.

Secular drives. Understand this too.

The fourth thing to understand is that the more things change the more they stay the same. Humans gotta human. There will always be permabulls and permabears arguing. Most humans prefer the now over the future. There are ways to leverage this. So ...

3%

7Wannabe5
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Re: Population Growth

Post by 7Wannabe5 »

OTOH, the humans most likely to prefer the Now over the Future are the Young (excepting the Young born with Old Souls AKA most members of this forum and the Old with Permanently Young Souls AKA The Boomers) So, the demographic shift that might be more important is the relative aging of the population as growth declines. For instance, what is the potential fall out from China getting old before it gets as rich as the West? 3% does represent the growth of timber, but tree to timber requires somebody with the vigor and motivation to harvest it.

IOW, consider how the model of only first born of four sons inherits the estate differs from model of 4 relatively wealthy grandparents and only 1 grandchild between them to inherit and/or diaper their butts in old age.

The Old Man
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Re: Population Growth

Post by The Old Man »

canoe wrote:
Mon Feb 27, 2023 9:13 pm
When do index funds and real estate stop being good default investments?
Index funds do not prevent against loss.
Real estate does not prevent against loss.

Index funds are merely an investment mechanism to buy the market. That is all they do. This structure provides no protection whatsoever against loss.

Real estate is more complicated. Ultimately, they are local investments. Their returns are highly dependent upon the local economy and new construction. Property owners, to support their property values, are highly vocal in restricting new developments through zoning and other means - thus, propping up prices. They are however dependent upon the local economy. If economic conditions deteriorate, then demand (and thus prices) for real estate will decline. This, even though the supply has not changed.

WFJ
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Re: Population Growth

Post by WFJ »

OP, why do you care what happens in 2,100 AD with investments??? Everyone on this forum will be dead in 2100 and hopefully not care about their asset returns.

ducknald_don
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Re: Population Growth

Post by ducknald_don »

If a twenty year old thinks assets will be worth less in 2100 then they won't be buying them from you in 2050 when you need the income.

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conwy
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Re: Population Growth

Post by conwy »

Governments and corporations don't just sit idly by while things like demographics change. Institutions are complex adaptive systems. If corporations can't make profit from population growth they find other ways to make profit.

(Though it might seem that the pace is slow and there's a lot of politics, in the long-run, changes do actually happen, e.g. look at Britain recently amending its immigration system or tech layoffs in Silicon Valley.)

Real expected returns are likely to be lower than in prior decades, but still beat inflation, according to some experts such as Anti Illmanen.

On the other hand, there's no reason to think the risk premium will spontaneously disappear just because the world changes demographically, climatically or in any other way. Stocks and bonds are likely to always earn a premium over cash simply because they are riskier assets. Within that asset class diversification is the best way to insure yourself against idiosyncratic risk. Low cost index funds are the most effective way to achieve that diversification.

If you want to lower the overall risk of your portfolio, while approaching or beating inflation, best to add some HISAs, CDs and/or Inflation Linked bonds.

Real estate, meaning individual properties, I'm skeptical of, both because they are idiosyncratic risk assets and because they seem to always come with some other liabilities attached, e.g. property tax, council tax, water rates, maintenance costs. My Inflation Linked bonds do not come with any sort of liability, and in fact, produce a risk-free dividend.

zbigi
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Re: Population Growth

Post by zbigi »

conwy wrote:
Sat Mar 11, 2023 9:49 pm
Stocks and bonds are likely to always earn a premium over cash simply because they are riskier assets.
That is not guaranteed. If, in the coming decades, the demographies of most rich countries will take the inverted pyramid shape (see Peter Zeihan videos on this), there will be a lot more of selling of investment assets than buying it. This will create a great downward pressure on stock prices. I don't see a reason why they couldn't perform worse than cash under such scenario.

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conwy
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Re: Population Growth

Post by conwy »

zbigi wrote:
Sun Mar 12, 2023 3:43 am
That is not guaranteed. If, in the coming decades, the demographies of most rich countries will take the inverted pyramid shape (see Peter Zeihan videos on this), there will be a lot more of selling of investment assets than buying it. This will create a great downward pressure on stock prices. I don't see a reason why they couldn't perform worse than cash under such scenario.
Sorry I should remove one word in what I wrote: "always" - it's true that, being risk assets, stocks and bonds *won't* always outperform cash. Over some time periods, the risk will be realised and the overall value of an index fund may go down even relative to the nominal amount it was purchased for. During such time periods, safer assets such as bonds, CDs and cash, can provide funds.

That said, I don't think it's guaranteed or even likely that stock prices will precipitously drop due to the demographic decline.

Firstly, focussing on demographics alone, it depends on which country / region we're talking about. Zeihan is broadly bullish on the US, New Zealand and France, which still have fairly good demographics. Meanwhile, in the emerging markets, he is bullish on South East Asia, which has booming demographics. If your portfolio is broadly diversified across countries / regions, you should be able to capture those upsides, to the extent that they are realised in rising stock prices.

However, there are other factors to consider. Some developed countries with poor demographics (such as Australia, Canada and the UK) are nonetheless well suited to immigration and can shore up their supply of low-end and high-end workers by importing talent.

Also, some developed countries are located in close proximity to areas with positive or even booming demographics and can use trade to offshore some of the labour they're short of internally (such as Australia and New Zealand, which can trade raw materials / commodities with South East Asia in return for various forms of labour). Zeihan covers this in some of his books.

The demographic shift is inevitable and momentous but I don't think it's cause to dump stocks altogether.

7Wannabe5
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Re: Population Growth

Post by 7Wannabe5 »

Here's a DIY solution to the demographic shift. Pronatalism primer interview on The Stoa:

https://www.youtube.com/watch?v=1YtUhWaTVg0

Their basic take seems to be that the preservation of cultural diversity should be attempted by encouraging the few humans who still want to have a big family in any/all cultural enclaves to consider having 9 kids rather than just 3. They also suggest that by doing this you might even be able to attract outside support for your efforts due to being your own cultural growth industry.

One note I found interesting was that the affluence effect that is correlated with decreasing birth rates only switches over to increasing birth rates at incomes of around $750,000, which is 10X the $75,000/year level where happiness becomes less correlated with income. IOW, it generally takes that level of income to think in terms of dynasty. However, I believe the Collins' are suggesting that "dynasty" can be achieved at lower income/wealth/spending levels, much akin to how ERE allows for middle-class lifestyles at much lower levels.

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