Possibility of negative return for all passive investments

[noskich]

What if in the near future average return on all passive investment becomes negative or near zero with only alternatives being too risky?

We have seen it happen in a few countries with interest rates, stock growth is slowing down, ability of countries to pay out to bond owners is under question...

That would mean that the time required to obtain a decent return might become comparable to a part-time (frequent sale and purchase to obtain return on capital investments such as real estate) or even a full-time (small business) job.

Would that be the end of classic ERE concept?

Any thoughts?

[jennypenny]

I worry about this. Especially now that there's talk of lowering or doing away with tax deductions for 401K (et al) and IRAs. I've always rationalized those contributions during bad years by telling myself at least we were getting something off of our tax bill. I read a paper suggesting that the government push retirement plans toward a Roth model. It would help governments in two ways--by increasing tax revenue now, and (if you believe in longterm low returns) decreasing the overall tax avoidance. The paper also suggested raising the tax rates on commodities, especially on medals and fuels like nat gas and petroleum products.
The only way to ERE in that scenario is to provide for yourself mostly through skills and your own resources and use a lot less money overall.

[karim]

Have interest rates ever been negative? You'll be able to earn something though it may not be the 11-13% of days past. And of course some terrible event can wipe out your money (this is a bigger concern for me). Also with a low withdrawal rate you can get by with a lower rate of return. Conclusion is save more and use less (meaning have a lower SWR), very ERE.

[EMJ]

Negative interest rates currently in Denmark, France

http://blogs.wsj.com/eurocrisis/2012/07 ... est-rates/
http://www.independent.co.uk/news/world ... 24768.html

[jacob]

"What if in the near future average return on all passive investment becomes negative or near zero with only alternatives being too risky?"
What if we're there now?
http://www.theaustralian.com.au/busines ... 6161616527
I think we've actually been there for a decade or so. See some of my posts on diversification and market indexing. It would make sense that during a regime of economic decline a pumped up financial world would have tiny or negative buy&hold returns with all the money converted into volatility. It's currently called risk-on/risk-off, but in the 1970s it was called a trading range. This does not mean daytrading, but it does mean paying attention every year or so to.
Since the economic decline may be secular, at least on a timescale of a few decades, I don't think this is something that can be waited out by just holding on.
A second explanation is that herd behavior creates market inefficiencies. Consider that buy and holding the same things is very predictable, it would make sense for someone to step in and correct this misbehavior.
That said, there are positive returns in some parts of the market. They're just getting overwhelmed by others (decaying, old-fashioned stuff like cars and housing) making the averages look bad. So the solution is to stay away from average.

[noskich]

"So the solution is to stay away from average."
Any more concrete advice Jacob?

Thanks.