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"It's better to expect and plan for lower returns and then be pleasantly surprised if you’re forecast turns out to be pessimistic"



Make sure that your investment returns are as close as possible to market returns

RP: Hello there. Short term predictions about the markets are notoriously inaccurate and investors should ignore them. But to produce a financial plan you do need to have a rough estimate of what future returns are likely to be. Market history provides a guide but it shouldn’t be relied on. Several prominent voices including Warren Buffet and Jack Bogle, the founder of Vanguard, have warned that investors should expect lower returns in the future than they've been accustomed to in the past.

Antti Ilmanen from AQR Capital Management is a highly respected authority on long-term asset class returns - and he agrees.

AI: Sadly, we can expect lower returns from today’s environment. That’s pretty obvious for anybody looking at bond deals which are near historical lows. But in addition, any other asset that we look at seems to have low starting years from today’s level, so if you look at the dividend or earning years of some equities, these types of measures tell us that we are near all-time lows on them as well. Overall we just find that all kinds long-only investments are expensive versus their histories offering something less, maybe half of what we could have expected in the last century.

RP: Of course no one knows exactly what the future holds. And experts will inevitably disagree. But I asked Antti Ilmanen to put approximate figures on future long-term returns.

AI: For bond markets, very modest. Just over 0 real returns is probably what’s feasible from here, given starting years. For equities the numbers are bigger, maybe 4 percent, maybe in Europe a little higher, 5 percent real long-run return from here. It’s higher than bonds but from a historical perspective it’s very low, the historical range has been it’s been 3-15, looking at the last 100 years of data. So both asset classes offer much less than it has been the norm.

RP: If indeed we are entering an era of lower investment returns it’s more important than ever to make sure that your returns as close as possible to market returns. That means keeping a very tight rein on expenses, particularly management fees and transaction costs. And also being disciplined, in other words, stick to your plan through thick and thin. The evidence clearly shows that trying to time the market has a negative impact on returns.

Of course, it may turn out that the likes of Buffet and Bogle are being overcautious. But in any case, it’s wise to expect and plan for lower returns and then be pleasantly surprised if you’re forecast turns out to be pessimistic. Thanks for watching.

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