It’s important to keep a realistic mindset when investing, and it’s important to be prepared for the fact that investment returns may be lower than expected in the future. In this video, ROBIN POWELL talked to AQR Capital Management’s ANTTI ILMANEN about what ordinary investors can do.
TRANSCRIPT
Robin Powell: You have to be an optimist, to some extent, to be an equity investor; but you also need to be realistic – and that means accepting the possibility that returns may be lower in the future than they have been in the past. Several highly respected commentators have warned of lower expected returns. Among them is Antti Ilmanen, an investment strategist at AQR Capital Management in Connecticut, who has written a book on the subject.
Antti Ilmanen: If I had to pick the sort of fundamental story why we are in this world, it is around this idea of a “savings glut”, which has been 20 years in the making. It could be a savings glut from emerging markets, it could be from the pension savers, it can be from the wealthy who have all got higher savings rates, and that is probably something that is not immediately going away.
RP: This savings glut, says Antti Ilmanen, has pushed up prices in all of the major asset classes, including stocks, bonds and property – which poses a dilemma for long-term investors. Do they reduce the risk they’re taking, or do they take more risk to offset the possibility of lower returns in the future?
AI: With this characteristically balance-seeking way, I think the middle way appeals to me. So I think that you should consider both more risk and less risk, and if you feel strongly, go with either way. I would probably stick with a long-run, normal amount of risk, and try to accept serenely that, in today’s world, that implies lower return and lower spending than in the past when we had the tail winds.
RP: One option that’s been gaining traction is investing in private equity instead of publicly listed stocks. Private equity did outperform public markets when it first became popular in the mid-2000s, but it hasn’t done so more recently.
AI: If I study historical data, and I show this in the book, the valuation gap between public and private equity narrowed quite meaningfully just around that time. And since then, we’ve had a very narrow gap between private and public equity and slimmer outperformance than was the case earlier.
RP: Antti Ilmanen’s advice to ordinary investors is essentially two-fold. First, diversify broadly. And secondly, remain patient and disciplined.
AI: Good investing results require both good investments and good investors; so, I mainly talk about strategies but I did – at the end – focus quite a bit on this. What’s a good investor? And it’s preaching about patience over return chasing, humility over overconfidence, discipline over emotions. I would add – not everyone does – but I would add probabilistic thinking over story-telling.
RP: Of course, we don’t know for certain that investment returns will be lower in the future. They may not be. But investors need to be prepared. And for many of us, that might mean putting more money away for retirement than we have been until now.
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