The pdf book “Investing Amid Low Expected Returns” provides important insights into investing amid a low return environment. With interest rates at historical lows, the author argues that future investment returns will likely be lower than what was achieved in the 20th century. This has profound implications for asset allocation and portfolio construction.
Main reasons for low expected investment returns
The book identifies several key reasons why future returns are expected to be low compared to historical levels:
1. High current valuations – Stock and bond valuations are elevated after a decade-long bull market, leaving less room for further price appreciation.
2. Low interest rates – With central bank policy rates near zero, bonds offer lower yields. Rising rates could hurt bond prices.
3. Below-average economic growth – Trend GDP growth has slowed, hampering corporate profit growth which drives stock returns.
4. Demographics – Retiring baby boomers drawing down assets puts downward pressure on prices.
The combined effect of these forces suggests investors should temper their return expectations going forward.
Implications for asset allocation and portfolio construction
The low return regime calls for rethinking portfolio design:
1. Greater portfolio diversification – Expanding to alternative assets can help manage risk and boost returns.
2. More dynamic allocation – Tilting allocations in response to valuation and cyclical factors can add value.
3. Lower return assumptions – Financial plans may need to be adjusted with lower withdrawal rates.
4. Greater savings rates – Higher savings can offset lower returns in meeting financial goals.
Focus on value, fees, taxes, and risk management
The book stresses other keys to investing success amid lower returns:
1. Seek value – Buying cheap assets can provide better long-term returns.
2. Minimize fees and taxes – These expenses directly reduce net returns.
3. Diversify risks – Blend asset classes and investment factors to smooth volatility.
4. Rebalance portfolio – This forces selling high and buying low to enhance returns.
The future investment landscape poses challenges but also opportunities. By focusing on value, managing fees and risk, and adjusting return assumptions, investors can still achieve their financial objectives.