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What can investors do in the face of low returns?

Image of dark clouds with text reading “gloomy forecast” as a metaphor for low return predictions.

Experts have warned us to prepare for low returns from investing for years now.

Count me as skeptical about the value of such predictions.

You may recall in 2012 the UK regulator dropping a bomb on pension forecasts.

The FSA1 told financial providers to project low returns into the future, compared to the higher gains enjoyed in the past.

But as I opined at the time:

… here we have the regulator rolling up to the scene of the crime not long after the worst decade for equities relative to bonds (the worst two decades, even) to warn us – wait for it – to temper our expectations.

As far as useful advice goes, this is a bit like Eva Braun showing up in London in the middle of the Blitz to warn Churchill that her boyfriend seems a bit obsessed with guns.

The Investor, Monevator, November 2012

I suggested returns would likely be healthy going forward. Happily, that optimistic view has been borne out so far.

  • Government bonds have done very well since November 2012.
  • Global equities have returned more than 130% for British investors.
  • We have seen relatively low returns from UK shares since 2012, but I don’t believe the FCA foresaw Brexit. Besides, the FTSE All-Share still gave you 70%, with dividends, since November 2012. Hardly a disaster.

To be fair, regulators must err on the side of caution. It’s their role. If you go to a job interview at a regulator, you should get extra marks if you sniff suspiciously over the biscuits.

Nobody should want a regulator to be mad for it.

Low returns for Generation Z

However when academics like the number-crunchers behind the Credit Suisse Global Investment Yearbook warn us to prepare for low returns in the future, you have pay some attention.

The respected trio of Dimson, Staunton, and Marsh are not a 1960s folk outfit who sang about sandals, but rather three London-based academics. And they dropped their prophecy of doom in the latest edition of their Yearbook.

The threesome point out that expected real returns (that is, returns after adjusting for inflation) from safe government bonds are very low these days. Negative, even. Not very enticing.

They then provide evidence that low real yields have previously correlated to lower returns from other asset classes, too.

Finally, they reveal the horror-graph below.

Warning! If you’re under-35 and you’ve just started investing, make sure you’re sitting down.

Source: Credit Suisse Equity Yearbook 2021

Previous generations – led by those blessed Boomers, naturally – have enjoyed many bountiful decades as investors.

Crashes have come and gone. But global equities have still delivered on average 5% or more in real terms on an annualized basis.

Bonds also did great, particularly recently. Notable given their lower risks.

However if you were born after Nirvana’s Curt Cobain shuffled off this mortal coil then you’re twice cursed.

Dimson, Staunton, and Marsh have run the numbers. They think Generation Z – those born in the mid-1990s or later – can reasonably expect to earn 3% in real terms from equities.

That is far less than the 5% or more we’ve seen previously. And it’s worse than it possibly appears at first glance.

  • For example, save £10,000 a year and achieve a 5% annualised real return and you’d have nearly £700,000 in today’s money after 30 years.
  • But at 3%, you’d be left with slightly less than £500,000.

Over many years, that extra 2% adds up to a whole lot more.

As for bonds, Dimson, Staunton, and Marsh expect negative real returns.

I think private investors might as well hold at least some of their bond allocation in cash nowadays, as we’ve said before. You’ll still get a negative real return, with today’s interest and inflation rates. But your cash will have zero volatility and downside, and it can be reinvested later in better times.

Note: this isn’t something to decide on a whim! Government bonds can provide proven diversification benefits versus equities in times of stress. You won’t get that from cash.

Remember you don’t have to (and probably shouldn’t) go all in/out. You could do say half your fixed income allocation in bonds, and half in cash.

What are you going to do about low returns?

Unlike in 2012, I’m not quite so ready to push back against this gloomy forecast.

For one thing, these guys are renowned academics – as opposed to a regulator with an interest in scaring us into being more financially prudent.

More importantly, we all know that risk-free government bond yields are indeed still incredibly low. Negative, in some cases, in real terms.

Clearly we must expect low returns from an asset class that’s nailed-on to give us worse than nothing, after inflation. (If we see deflation, government bonds will do better. But trust me, you don’t want to root for deflation.)

All other asset classes key off the yields available on (presumed) risk-free government bonds – especially the yield on US Treasuries.

As I’ve explained previously, this includes the returns you can expect from equities. So dumping your bonds and expecting a bumper harvest from shares is – at the least – naive.

If the academics are right (I’m not convinced returns are predictable, but they have more letters after their names than me) then what can you do?

Well, what you can’t do is change when you were born. You have to play the hand you’re given.

Focus on what you can control if you want to deploy countermeasures:

Check your investing costs

If real returns from equities are only going to be 3%, then the difference between using index funds that charge 0.4% and funds that charge 0.1% is 10% of your total expected real return. You can’t afford to waste money like a Boomer, so switch to the cheapest funds. Same goes for brokers.

Save more

Can you trim more savings from your lifestyle run-rate? Can you put more money into your pension to earn an additional employer match and a tax relief bump? Saving more is the surest driver of a better final result.

Invest for longer

A close second is allowing your money to compound for longer. Compound interest takes time. More time compounding means more years to save, too. Finally, the later you leave it to start drawing on your pot, the fewer years your portfolio will need to sustain you. Just don’t wait forever!

Lower your expectations

If you lower your expected returns and you don’t want to save more or retire later, you might make do with less. The Retirement Living Standards initiative tries to project how much income you’ll need to retire to a given level of comfort. Could you handle ‘moderate’ instead of ‘comfortable’? (I’d be wary of going down this route, especially if retiring early.)

Consider alternative assets

I’m sure it’d be appealing to have your investments work harder to take the strain, rather than you. Perhaps you could swap some of your fixed income allocation for infrastructure funds or renewable energy trusts? Yeah, maybe. The trouble is you’re often getting more equity-like volatility for potentially not hugely more return. By all means research and dabble with say 5-10% of your portfolio. But understand the trade-offs.

(Cautiously) chase yield

Similarly, government bonds from the developed economies aren’t the only fruit. You could add higher-yielding emerging market bonds, investment grade corporate bonds, junk bonds, and even preference shares. But again, you’re not getting something for nothing. At the least, swapping some safer bonds for riskier ones will mean deeper falls for your portfolio when the market dives – and potentially even permanent capital loss. Be careful.

Dabble with factor investing on the side

Academic research suggests certain kinds of shares deliver superior long-term returns, although for most of the so-called return premium / factors there’s been little sign of that in recent years. The good news is an allocation to value stocks or a small cap fund is approved even for passive investors. See our articles. The bad news is you don’t know whether your Smart Beta fund will actually lag the market over your investing lifetime.

Go to the dark side: active management

Well, well, well… fancy seeing you here. Seriously, if you’re suddenly willing to pay a fund manager 1.5% to try to get back your missing 2%, I’d think again. Active investing is a zero sum game. On average half of the people who go down this path will do worse – and there will be higher fees for all of them. As for stock picking, I do it but it’s not something to pick up because you like the sound of 10% a year. You’ve got to love the game, man! (Love it because the chances are you are going to lose at it.)

Live more uncomfortably, and do something hard

A wise man once said: if you want easy money then do something hard. Buy-to-let is a lot more hassle than owning a REIT, but you can employ an edge (find a better property), improve your investment (refurbish and remodel), and also gear up your returns (with a mortgage). That’s even more true of starting a business – or a time-sapping side hustle. You could strive for a higher salary to save more. Or you could run equities at 100% and resolve to turn your computer off for 1-10 years if (/when) there’s a big bear market. Risky, but it is an option. Especially if you’re in your 20s or 30s. You’d be paying for any higher returns with more risk (equities might never come back) and more pain (you’ll stay up at night wondering if they will.)

Remember that nobody in those previous generations were gifted those pleasant returns, not even the Boomers. Many times your parents or grandparents felt their world might be ending.

You can never bank on expected returns. That will never change.


My co-blogger The Accumulator has explained how making adjustments to the dials on your investing plan is a better strategy than simply quadrupling down on risk, say.

Do a bit of everything to make the numbers work. Save a little more, retire a little later, and hold a little bit more in shares.

But don’t just stick 12% into your calculations and pray because that’s the return you need to achieve.

Hope is not a strategy.2

If we assume we’ll see low returns in the future compared to those enjoyed by previous generations, we can at least take remedial action.

And if equities do deliver 5% real returns over your investing lifetime? Thus leaving you with a fatter-than-expected pot to live on?

I’m sure you won’t be asking for a refund.

  1. A now-defunct regulator, basically replaced by the FCA. []
  2. Although that doesn’t stop institutional investors when pitching for business. “Sure we’ll hit 10% annualised! How? We’ll add… a secret hedge fund! And a proprietary bit of private equity! Trust us – we’re in finance!” []
{ 27 comments… add one }
  • 1 An Admirer March 23, 2021, 12:41 pm

    An interesting read and certainly a very relevant one. A rock and a hard place it indeed is. As you say, I think a “mix-and-match” approach is a prudent one.

    Personally, I believe persistently low interest rates have contributed hugely to this. But this isn’t really as completely a modern phenomenon as it may appear, rather indeed a policy decision. The CEPR report makes very interesting reading (way back from 2015, if you can wade through it all!): https://cepr.org/sites/default/files/geneva_reports/GenevaP266.pdf

    It’s paradoxically reassuring yet disturbing to see that even those at the top of industry and government seriously struggle with this across the Western world.

    I like to believe that risk and return are still correlated – so low returns are consequential of the (generally) low risk world we’re lucky to inhabit these days; low risk of war and conflict with generally ever-increasingly better living conditions, longer life etc. The end of the Cold War marked a big turning point. Perhaps this is the price we pay as investors? It’s a nice thought although doesn’t help my portfolio!

  • 2 Marcus March 23, 2021, 2:33 pm

    I am skeptical of the Credit Suisse projections. The equity risk premium is a useful theoretical device for explaining long term outperformance of equities relative to bonds, but I do not think you can just take an average and slap that on the bond return to predict future equity returns. The equity risk premium varies a lot over time and sometimes for long periods. As can be seen in the graph, only the Boomers experienced the 3.5% average premium; Millenials have actually had an equity risk discount it seems! That must mean there are periods when it is considerably higher than the 3.5% average. Why can’t that be the next 10 or 20 years? None at all. They may be academics but I think this really is a bad way to try and do the impossible (i.e. predict equity returns). I think I have seen more convincing arguments for low equity returns in the coming years, but it’s all finger in the wind stuff to my mind.
    Putting that aside, another useful and thought-provoking article. Cheers

  • 3 HariSeldon March 23, 2021, 2:34 pm

    Good summary, I am always surprised when people are prepared to make forecasts that cover a long period of time, so much more scope for the unexpected…

  • 4 Dan March 23, 2021, 3:02 pm

    @HariSeldon Next you’ll say psychohistory does not work!

    If there’s something I’ve learnt through life and through reading this blog over the years is that we really really really just don’t know, so diversify.

  • 5 BuildBackBetter March 23, 2021, 3:15 pm

    Always take these ‘real’ returns with a pinch of salt. What inflation measure was used? CPI? RPI? Inflation in US? UK? Europe? Global average? Why would an average make sense for a UK investor?
    Also, more importantly, what was their prediction last time? How did it turn out?

  • 6 Matt March 23, 2021, 4:57 pm

    A minor editorial niggle – Elroy Dimson is in fact one person – so they would be a folk (or academic) duo, with an interesting naming approach.

    With returns at this level, shaving every 0.1% off your costs by going passive makes a larger percentage difference than it does if returns are at higher. In Note to self: where possible, ditch those remaining active funds ASAP.

    I am using 4% in my personal projections – I thought I was being cautious but perhaps I am in fact being slightly optimistic.

    Counting back 40 years and looking at it from the perspective of somebody who retired in 1981, we’ve reinvented the global economy twice in that period, no reason to think thats not going to happen again, although I’m still trying to digest the implications of the ‘Prospect’ article from last weekend.

  • 7 The Investor March 23, 2021, 5:20 pm

    @Matt — Oh cripes, that’s mortifying. Total brain failure! I’ve even met Elroy Dimson (and very charming he was, too).

    I’ve corrected the text above.

    Very good point on costs. This was actually what the whole article was going to be about, but somewhere along the line I got distracted by my folk joke and lost the plot. I think I might add a subsection in about that, now you’ve reminded me.

    Cheers for picking up my idiot error. (Lucky @TA has a sub-editor. Me! I’ve got nobody. 🙁 Tiny violins.)

  • 8 Accidentally Retired March 23, 2021, 6:42 pm

    As long as the world continues to harness natural resources and create new and more innovative products/solutions, I can’t see how we will be in a a dark period for overall market growth.

    Even once we run out of our finite resources on earth, then we can look to the solar system and beyond. The sun, throws more energy our way in an hour, than we can use in a year. So I am hopeful that we’ll figure out how to continue to make the most of what nature has given us, and create bigger/better economy for all.

    That said, I agree it is best to lower your investment costs and invest in alternatives.

  • 9 Mr Optimistic March 23, 2021, 6:51 pm

    Is the text corrected ?
    ‘…. charge 0.4% and funds that charge 0.1%’
    Did you mean 1% ?

  • 10 c-strong March 23, 2021, 7:58 pm

    @Marcus – I’m a big fan of D, M and S and the publication of the CSYB is a highlight of my year (yes I am that sad) but I entirely agree with you, and I think they’ve jumped the shark on this one. Though the rest of the yearbook is a good read – they should stick to history rather than forecasting.

    @TI – Excellent article as ever. I use a combo of some of these strategies, including a substantial allocation to small cap value, and the only bonds I have are risky ones (emerging market debt, and UK retail bonds) though they are more there as diversifiers and I don’t think of them as a bond allocation in the traditional sense.

    The other thing I do differently from the average passive investor is to have a bunch of different regional and country-specific passively managed ETFs so that I can essentially roll my own global fund, with weightings between regions and countries based on valuation considerations rather than market cap. So a kind of active passive allocation. Fees, dealing costs etc. are higher by about 20bps, but I hope and expect that higher returns will outweigh the extra costs.

  • 11 Naeclue March 23, 2021, 8:02 pm

    What can investors do in the face of low returns? Not much really. I have advised our kids to go all in equities with their long term portfolios and just grit their teeth through the large market falls. And keep costs down of course. Todays’ investors may just end up having to save harder than previous generations, but nobody really knows. One advantage investors do have now is that the costs of investing globally are the lowest that they have ever been.

    The link shows how unreliable the FSA is when it comes to predictions, but to be fair to the FSA, nobody else is much better. The most reliable predictor of future market returns is probably Shiller’s CAPE, but even that is far from perfect. StarCapital AG give the current World CAPE a value of 22.3, compared to about 15 on average. Not hugely elevated, but still elevated and suggesting below average future returns.

  • 12 SemiPassive March 23, 2021, 8:03 pm

    EM bonds are just starting to look interesting again as they nudge closer to 5% yield, infrastructure trusts – particularly green energy – yielding 5-6%, a good mix of UK and global equity income trusts and ETFs yielding anything from just under 3 to 5%, and just enough cash so you can sleep at night.

    For the past few years a simple global tracker combined with gilts or US treasuries has outperformed the above, but I’m hopeful the above mentioned blend will do well enough over the next decade and onwards.
    I’m more hopeful of that than relying on gilts and US treasuries going to negative yields and driving US tech stocks to ever higher historic valuations.

  • 13 Naeclue March 23, 2021, 8:09 pm

    @c-strong “I can essentially roll my own global fund, with weightings between regions and countries based on valuation considerations rather than market cap.”

    Doing that the last several years would have left you underweight US shares. That would not have worked out well.

  • 14 c-strong March 23, 2021, 9:24 pm

    @Naeclue – Actually, we don’t know yet how it would have worked out, and won’t until 15+ years time when I come to sell out (or at least start decumulating). What you mean is that I would have missed US equities going from pricey to eye-wateringly expensive, since most of the recent growth has come from multiple expansion rather than increased earnings.

    Luckily for me I was invested in a global tracker fund during that period. But my US broad market exposure is now zero. Nada. Zilch. Maybe that will turn out to be a mistake, based on actual returns. But I think it is very difficult to say that the *expected* return of non-US stocks over the next, say, 10 years is lower than that of US stocks.

  • 15 BondDebate March 24, 2021, 8:46 am

    Thanks TI for this thought provoking article, the bond v equities allocation is an ongoing internal debate for me. Re a strategy of some bonds & cash I’m interested to know if for you this means cash inside a pension or not?

  • 16 The Investor March 24, 2021, 11:27 am

    Thanks for the comments all. A few replies:

    @NaeClue — Ah, well it’s always easy to advise kids. 🙂 I’m finding it hardly to blithely assume I have high multiple decades ahead of me. (Think this is my version of a mid-life crisis!)

    @Mr Optimistic — 0.4% costs versus 0.1% costs is 0.3% per annum. If you’re only expected 3% (real) then paying that extra 0.3% for the more expensive fund is eating up 10% of your expected real return, no? 🙂

    @c-strong — Fair enough, that’s pretty active investing but you seem to understand that from what you’ve written. 🙂 I go around in circles with non-safe bonds. E.g. I bought a bunch of high yield corporate bond trusts recently (NCYF, HDIV, IPE etc) but have sold them for 3-4% gains as I usually end up doing. The trouble is they do just as badly as equities in a big drawdown (see March 2020) so while I buy them for supposed non-crisis diversification/a source of funds, I end up raiding that source of funds as soon as something shinier comes along (e.g. certain beaten-up US tech 🙂 ). I do think these trusts are interesting in that they should mostly be less volatile then equities but supported by a return to growth. But I would have them on a very short, very non-passive leash. 🙂

    @BondDebate — I’m not a passive investor so “for you” doesn’t really work as a question for me. 🙂 Personally I keep most of my cash in normal accounts, and include things like Premium Bonds as cash. If I was a passive investor expecting to run a very large cash allocation then I’d definitely consider how to best shelter it.

  • 17 Andrew March 24, 2021, 11:42 am

    I have cash waiting for the new ISA tax year and have no idea where to put it. It’s probably going to end up going in to VWRP, and maybe some REITs, simply for lack of better ideas.

    A lot of the more exotic/interesting options right now seem seem to be off the table to retail investors.

    As an example: Good, highly diversified emerging market equity ETFs or emerging market bond funds seem to be hard to find. AJ Bell has the “M&G Emerging Markets Bond Fund” (a long duration, BB rated bond fund) on its favorite funds list, with a yield of >5%, but the minimum initial investment is £500,000. Great, thanks AJ.

    Lots of bears out there are saying there are fair valuations in “emerging value” stocks, but actually finding an ETF or Fund that targets this segment and is available to UK retail investors is impossible.

  • 18 The Investor March 24, 2021, 11:50 am

    @Andrew — iShares has an emerging market bond ETF, ticker: SEMB, that gets touted quite a bit. I’ve owned now and then. (Not a personal recommendation etc.)

  • 19 Naeclue March 24, 2021, 12:19 pm

    @TI, not just advice for the kids – we are 90% in equities and are in decumulation.

    To give some perspective on the reliability of what Dimson et al are saying, in the 2013 edition of the yearbook there is a chapter “The low-return world” in which they predicted, guess what?

    “Adding an equity premium of 3%–3½% to these negative/low real expected
    cash returns gives an expected real equity return in the region of 3%–3½% over 20–30 years. We are indeed living in a low-return world.”

    8 years on the MSCI World Index has delivered 10.2% real.

    No more reliable than the FSA were.

  • 20 Neverland March 24, 2021, 2:12 pm

    Or we just have a massive crash and then returns are pretty good after that

    Reading that crap like deliveroo, pensionbee and wework are floating that seems a lot more likely

  • 21 Naeclue March 24, 2021, 2:52 pm

    @Neverland has a good point about sequence of returns. Total real return of the MSCI World Index in pounds between end 1999 and end 2019 was 3.2%, so not great and about the same as Dimson et al are predicting again. But investors investing the same inflation adjusted amount every year from end 1999 to end 2018 would have seen internal rate of return of 6.7%. Doesn’t always work out that way, but a long running bear market or series of crashes can do wonders for accumulators provided they keep investing through market lows.

  • 22 GenZ March 24, 2021, 4:42 pm

    Forgive me as I am new to all this. But if growth is to slow, would it then be beneficial as a 24yr to start investing more heavily into low cost global dividend index funds?

  • 23 HariSeldon March 24, 2021, 6:43 pm


    No one knows what will happen…. no one!

    At 24 go for a World Index tracker, invest on a regular basis and then have fun, don’t look at the numbers too hard, they will go up and down, but you will do fabulously over the next 20 or 30 years.

    I assisted an elderly relative about 25 years ago, a conservative portfolio split between equities and bonds. It has not been touched since but has been observed, it’s done great, not that much behind my own returns and I have spent a huge amount of time over the last 25 years on investment matters.

    Invest over a lengthy period of time, on a regular basis, a low cost world tracker, never fiddle, never sell, DO NOTHING and you will do just great.

    Don’t forget the have fun bit.

  • 24 MrOptimistic March 24, 2021, 7:29 pm

    @TI. Ah. I thought ‘funds that charge 0.1% ‘ meant OEICs which of course charge more, hence the did you mean 1%.

  • 25 Neverland March 24, 2021, 7:34 pm


    Marry into money. Not kidding.

  • 26 ZXSpectrum48k March 24, 2021, 7:48 pm

    I don’t think you should put too much weight on any single valuation metric, but it’s easy to see that lower real bond yields and lower inflation expectations have been a massive tailwind for risky assets in the last 30+ years. Moving from 9% to 1.5% yield in 10-year UST roughly doubles the discount factor. That’s an extra 240bp/annum purely due to changes in the discount curve, even if nothing happened to the growth projection curve.

    To fully reverse that, however, would require sustained high levels of inflation. Near-term we’ll see inflation coming back due to base effects and volatiles (oil), perhaps putting bond yields back at 2-3%. Much higher yields would require higher long-term inflation expectations and that has typically required wage inflation. Long-term (10 years+) that’s possible but it’s much harder to see near-term.

    Right now, I’m more concerned about what happens when the fiscal transfer from govts to private sector goes into reverse. That’s been a key tailwind for all assets in the last year. . The US Treasury is in the process of mailing out cheques for $1.7 trillion right now and some of that is ending up in S&P, property, Bitcoin, whatever. I haven’t wanted to fight that flow. Yet, it will reverse over the next few years (tax rises, deferred consumption). Add in some Fed tightening, and that combination could probably take some of the ‘puff’ out of the market.

  • 27 MrOptimistic March 26, 2021, 12:39 pm

    @ZX. On that subject there’s a terrific article in today’s FT by Martin Wolf. Took me all the way back to my younger years in the 70’s.

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