In the current market environment, investing amid low expected returns has become a prominent challenge. With interest rates still hovering near historic lows, and equity market valuations stretched in many sectors, generating meaningful long-term returns requires creativity, discipline and an understanding of how to adapt traditional approaches. In this article, we will explore pragmatic strategies investors can employ to help achieve their financial goals despite the headwinds of lower expected returns across numerous asset classes.
Focus on minimizing costs and taxes to maximize net returns
As aggregate market returns decrease, seemingly small fees and taxes claim a higher percentage of total returns over time. Minimizing trading costs, mutual fund expense ratios, and tax drag can meaningfully increase an investor’s share of the returns generated. Strategies like tax-loss harvesting, holding broad index funds with rock-bottom fees, avoiding overlapping funds covering similar asset classes, and keeping turnover low are key. The benefits of cost and tax efficiencies compound over decades – a huge advantage in a lower return world.
Construct a truly diversified portfolio across asset classes
The traditional stock-bond portfolio construction is likely insufficient to generate required returns in today’s markets. Investors should diversify into alternative assets like real estate, commodities, managed futures strategies, and beyond. While more complex, expanding the opportunity set increases the likelihood of meeting return objectives. Many alternatives also provide diversification benefits, improving the portfolio’s risk-adjusted return profile. With thorough research and advice from experienced financial advisors, a prudent allocation to alternatives can juice up portfolio returns.
Take advantage of periodic market disruptions and mispricings
Market volatility and asset mispricings will still occur in lower return environments, providing chances to generate outsized returns. Investors able to act opportunistically and add risk when others are panicking can capitalize. Of course, this requires maintaining dry powder, guts, and a long-term perspective. Deploying cash into stocks, corporate bonds, structured credit and other assets when they experience dislocations has been handsomely rewarded over market cycles. Avoid forced selling into weaknesses and rebalance back to targets when appropriate. Follow proven contrarian approaches.
Utilize prudent leverage in moderation when valuations justify it
While risky if misused, judicious leverage can enhance returns when deployed prudently during periods of higher prospective returns. Assets like real estate, structured credit, and equities will still have cycles where risk is being sufficiently compensated. Applying conservative leverage to amplify exposure to oversold assets and sectors can generate higher returns without radically changing the risk profile. This requires careful monitoring of loan-to-value ratios and interest rate risks. Work closely with experienced advisors on how to carefully incorporate leverage.
Take a global perspective to capitalize on varying regional opportunities
The U.S., while still possessing quality investment opportunities, no longer boasts the clearly superior risk-adjusted return outlook relative to other developed and emerging markets. Maintaining a global perspective and capitalizing on regions with brighter prospects for equity returns, higher yields, or currency strengths diversifies away U.S-centric risks. Regularly revisiting global capital market assumptions and incorporating local advice is key. Investing overseas also provides currency diversification benefits over time.
Navigating today’s low expected return environment successfully requires flexibility, diversification, risk awareness, and an opportunistic mindset. Cost and tax efficiencies, expanding the opportunity set globally across assets, maintaining dry powder to capitalize on volatility, incorporating prudent leverage, and staying nimble are key strategies to consider. With proper education, discipline and professional guidance, investors can still grow their wealth despite the headwinds.