By ROBIN POWELL
Equity investing is very hard for pessimists. You have to be an optimist to some degree to put money in the stock market at all. You need to have faith in human enterprise and resilience. You have to believe, ultimately, that markets will reward your patience and discipline. But over-optimism is no good either. Stock prices can fall with breathtaking speed, and markets can remain in the doldrums for many years. Realism, then, is what investors need, and that means accepting the strong possibility of low returns in the future — or at least lower than they have been in the past.
Why low returns are likely
Why? Well, when you include dividends, total returns have been pretty impressive for the last four decades. OK, markets have had a wobble in the last couple of weeks, but they surprised almost every market pundit by staging a remarkably strong recovery from the crash of March 2020.
Even now, despite the recent volatility, some markets are trading at or near all-time highs. And remember, the higher the price you pay for a security, the lower your expected return going forwards.
So, what other evidence is there that future returns will be lower? If it’s true, how much lower are we talking about? How long will low returns persist for? And what if anything can, or should, investors do about low returns? Should they, for example, be willing to take more risk? Should they invest more money? Or should they just carry on as before, accepting the likelihood of lower returns, and perhaps having to cut their spending, in the future?
These are some of the questions I put to Antti Ilmanen, an investment strategist at AQR Capital Management in Greenwich, Connecticut, in the latest episode of the TEBI Podcast.
Antti is the author of a new book, Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least.
Granted, it’s not a book for the casual reader. But for anyone with a serious interest in evidence-based investing, and particularly for those responsible for managing other people’s money, I can highly recommend it.
Enjoy the podcast and, as always, please do share our content if you find it helpful.
Is Antti Ilmanen right? Are we heading for a prolonged period of low returns? And what can investors do about low returns, other than take more risk? We’d love to hear your views on Twitter, LinkedIn or Facebook, so please join the conversation.
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