We all like to think of Canada as a young, muscular nation. Ah, if only it were so.
Based upon the median age of our population, Canada is well into the creaky-knee stage of life. With a typical age of 42.2 years, we're not quite as geriatric as Japan (47.3 years) or Germany (47.1), but we're significantly older than the United States (38.1) and much more wrinkled than Mexico (28.3) or India (27.9).
Investors may want to ponder this global age spectrum. If you have been basing your financial strategy on the experience of the past 30 years, the numbers provide lots of reasons to adjust your expectations.
One implication is that Canada may not be the place to look for rapid growth over the next decade.
This is not to play down our ingenuity or work ethic. It's simply to underline the effects of demographic change.
Economic growth rests on two factors – gains in productivity and increases in the number of workers. Productivity gains in recent decades have typically been on the order of 1 per cent to 1.5 per cent a year. Labour-force expansion has provided as much, if not more, of our overall growth.
But that happy situation is ending as boomers retire and Canada ages. In fact, Canada's working-age population – that is, the number of people between the ages of 15 and 64 – is now barely growing at all. It's expanding at only about 0.6 per cent a year, about half the pace of a decade ago and only about a quarter of its growth rate during the early 1970s.
The greying of Canada's work force puts a limit on how fast we can reasonably expect the economy to grow.
Even with optimistic assumptions about productivity growth, it's tough to envision how gross domestic product can expand at much more than 2 per cent a year on average over the decade ahead. That, of course, is well below the 3-per-cent-plus rates that used to be considered standard.
To be sure, this isn't just a Canadian issue. Based upon much the same logic, the Federal Reserve Bank of San Francisco estimates the sustainable growth rate for the U.S. economy is now only 1.7 per cent a year. Apply the same reasoning to Japan or Germany, and the numbers look even more lacklustre.
In general, the greying of the developed world suggests investors should tilt more toward emerging markets than they have in the past.
There are complications in this story – notably the rapid aging that China will experience as a result of its one-child policy, and the admittedly weak link between GDP growth and stock returns – but it is tough to argue with the broad notion that younger countries will offer just as many, if not more, opportunities than older ones over the years ahead.
At the same time, investors may want to keep their expectations for bond returns in check. All the recent chatter about the U.S. Federal Reserve "normalizing" interest rates suggests that today's paltry bond yields are poised to surge higher – maybe even to levels that were common 10 or 15 years ago, when yields of 4 per cent or more were typical on longer-term, ultrasafe government bonds.
That would be a major leap from today's levels and great news for savers. In Canada, a 10-year federal government bond is currently paying you only about 2.1 per cent a year, barely enough to stay ahead of inflation.
But is a big leap in bond yields really in the cards? Recent papers by researchers at the Bank of Japan and staff at the Bank of England, as well as earlier work by economists at the Federal Reserve, agree that aging populations are responsible for much of the persistent decline in real interest rates around the world. The experts forecast that low rates will be with us for a long time to come as populations keep greying, even if yields do creep up a bit from current levels.
This makes sense: Older populations with longer lifespans have an appetite for income-producing investments and their collective demand helps to push down the yields that bonds have to offer to attract buyers.
But the less-than-thrilling outlook for bond yields highlights the essential problem facing today's investors: How do you generate gains in a global economy where growth is slowing across much of the developed world and bonds aren't likely to suddenly start lavishing you with lush rewards?
Tilting toward emerging markets is one possible answer. Another possibility is to bet on a particular investing philosophy.
Momentum strategies, which bet on stocks that have recently gone up, have historically generated surprisingly strong results, according to an analysis in the most recent Credit Suisse Investment Returns Yearbook by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School. Income strategies (which emphasize high-yielding stocks), low volatility strategies (which look for stocks with steady, dependable returns) as well as value and size strategies have also paid off for some investors.
The problem, according to the researchers, is that the extra returns from such strategies tend to vary a lot between different periods and different markets.
So maybe it's time to consider the safest strategy of all: working longer. The one good aspect of slowing growth in the work force is that it means fewer new workers will be competing for jobs.
Extending your career by a couple of years can have a major impact on your financial health. Delaying retirement by even six months has the same impact on your retirement standard of living as saving an additional one-percentage point of your income for 30 years, according to a recent paper by Gila Bronshtein of Stanford University and colleagues.
So, yes, it would be nice to live in a world where bonds and stocks are poised to produce sizzling returns.
But in an environment where that doesn't seem as likely as it once did, you still have ways to make up the gap.