Investing Amid Low Expected Returns
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Investing Amid Low Expected Returns

Making the Most When Markets Offer the Least

Antti Ilmanen
Wiley, 2022
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Since the 2008 global financial crisis, investors have had many reasons to feel good. Low interest rates pushed stocks to record levels, leaving investors to reap what financial expert Antti Ilmanen considers “excess gains.” But the good times are coming to an end, Ilmanen warns in this useful study. In a world of higher interest rates, it’s unlikely that investors will continue to enjoy stellar returns. That means they need to start paying close attention to details like diversification and risk management. Ilmanen isn’t predicting a market collapse, but he does want investors to prepare for a challenging future.

Summary

Investors need to adapt to a new reality.

Individual investors have adjusted their expectations of returns to reflect a climate characterized by rich asset valuations and rock-bottom bond yields. Central banks kept rates low for years, and investors reaped the rewards. The era following the 2008 financial crisis has been one of robust realized returns. But the past is not a perfect roadmap to the future, and investors would be wise to change their expectations and investment strategies. Investors are likely to see lower returns than the ones they experienced in the 2010s.

The new reality of low returns will pose challenges for investors and savers of all stripes, from sophisticated pension funds to individuals. If returns do indeed revert to the mean, then compounding will become a less powerful force than it has been over the past few decades. The 2010s saw strong investment returns, thanks to low inflation and the growth of the FAMAG (Facebook, Apple, Microsoft, Amazon and Google) platform companies and their monopolies. But a clear pattern has emerged over history, one that sees a decade of strong returns followed by a decade of weak ones.

About the Author

Antti Ilmanen is principal and global co-head of the Portfolio Solutions Group at AQR Capital Management. He is the author of Expected Returns and holds a PhD in finance from the University of Chicago.

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