Expectation Management in a Low Investment Returns Environment

Sep 23, 2022

Many financial advisors would likely agree that client expectation management is one of the thorniest problems they face.

  • Will the market go up or down? (According to J.P. Morgan: “It will fluctuate.”)
  • Will my investments perform as expected? (George Soros: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”)

These two questions – there are, of course, many others – are but chaff in the wind compared with the challenge of client expectation management.

Investing Amid Low Expected Returns

Recently, a highly regarded investment authority called Antti Ilmanen published a book entitled Investing Amid Low Expected Returns.

Mr. Ilmanen is a Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management. In this role, he manages the team responsible for advising institutional investors and sovereign wealth funds and develops the firm’s broad investment ideas.

Mr. Ilmanen’s book covers several complicated ideas including illiquid investments, factor investing, ESG investing, risk mitigation strategies, market timing and more. It’s also supported by statistical charts covering such things as effective portfolio construction, risk management, and cost control practices.

Helpfully, The Economist has published a distillation of Mr. Ilmanen’s coverage of the whole top-down investment process and provided an easy-to-understand summary of the book’s principal conclusions.

Two Sources of Return and Three Courses of Action in a Low Yield Environment

As most of you know, there are two sources of return on an investment: income and capital gain. Recognizing this reality, Mr. Ilmanen makes clear that in a lower expected returns environment (which we are in now) investors are confronted by three courses of action:

  • Take more risk to achieve higher returns
  • Save more
  • Accept reality and play the hand you’ve been dealt

Reassuringly, Mr. Ilmanen advocates the third approach, while not avoiding the always sensible savings strategy – which for most of us involves, as The Economist appreciates, “sacrificing today for the sake of tomorrow.” What does Mr. Ilmanen advocate? As The Economist reports:

“He sets out a chapter-by-chapter analysis of various investment assets and styles. He advises how to put them together in a truly diversified portfolio. Along the way, he explains why market timing is a snare (you end up taking too little risk); what the true appeal of private equity is (not superior returns); and why portfolio insurance will not save you (it is too expensive in the long run).”

Diversify, Diversify, Diversify

And there you have it. A man of global stature in the world of investing, whose responsibilities include the management of billions of dollars in assets, comes down in favour of the tried and true: diversification. This is a principle that we and the financial advisors with most credit unions, have advocated consistently.

No blinding insights. No astonishing discoveries. No flashes of brilliance. And, certainly, no investing based on hunches.

Investing Amid Low Expected Returns guides us into the (relatively) steady investment waters where patience, serenity, logic and long-term thinking based on the undeniable truth that putting all your eggs in one basket (the opposite of diversification) is a grievous mistake. If you agree, be reassured that you’re in the company of a gentleman with an international reputation for investment excellence.



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