Some initial thoughts on a possible low-return investment environment

Bond yields are at historical lows. Some global (including U.S.) equity valuations are subjectively at historically high valuations (subjective meaning there is some varied opinion here). It’s impossible to know what this means in the short-term. It’s also very difficult to exploit in the short-term. The long-term historical evidence though suggests when valuations trade at high levels, future returns may be lower.

This is obvious in the bond market. Bond yields today range from 0.25% to as much as 4% depending on term and credit quality. (I don’t assume for junk bonds, since they often behave like stocks). So for planning purposes that is your forward-looking range on bonds. Stocks are a lot harder to predict, but there are various methodologies that suggest with multiples as high as they are today it’s conceivable that the future returns on stocks may be lower than historical returns — some suggest significantly so. (Google the topic along with authors/companies like Arnott, Shiller, El-Erian, PIMCO, etc. — none of these are an endorsement).

Fortunately, inflation has been fairly low, so even with less-than-exciting equity market and bond returns, when inflation is running about 2% your after-inflation returns can still be reasonable and help you achieve goals. Whether and if this changes we just don’t know, so being proactive is important.

For the sake of this discussion I’ll assume we all simply stick to our investment plans and don’t try to time the market and dive in and out of investments. More importantly, whether this low-return environment persists or not is not the point; rather, it’s important we think about what a low-return environment might mean to our financial plans.

Equally important, the financial planning and investment management industry is just starting to think hard about these issues. It’s important that if you do work with an advisor, you express your interest in this discussion. Being proactive with your advisor on this topic should be welcomed, although don’t expect him or her to know exactly what to do with it. As an industry we’ve simply never seen an environment like this before; we, too, are trying to understand its implications since they’re broad and still under discovery.

If I were planning for the possibility of a low-return environment I would start by considering the following:

  1. What if bond returns are half of the historical returns? Your portfolio return going forward is perhaps only 3–6%. If inflation is 2–3% you may still be okay, but does your plan account for this possibility? If you were planning on 6–8% returns, what happens to your plan if you get just 3–4%? Whether this happens or not, ask what you can do today to course correct.
  2. Further, just because a scenario shows a low-return environment doesn’t mean your volatility changes. Are you comfortable with a scenario where returns may be lower but volatility stays the same? Can you stick with the plan? This matters, too. Bailing at the worst time is even a worse situation than a low-return environment. For example, the risk-free CD or treasuries market is only 1.6–2.5% out to 10 years. Compare that to just 10 years ago when you could get 3–5%! Today, getting 3–5% likely means taking on more risk.
  3. If you can, would you work longer to pad your plan? If you like working, perhaps it’s worth your while to keep working. Finding meaning in your life, whether it’s work or some other endeavor, can significantly add to your financial independence longevity.
  4. In a low-return environment if you’re accumulating wealth savings should mathematically increase.
  5. Spending should also be under control. This is universal to any environment but especially important in a possible low-return environment.
  6. If you’re retired you may wish to adjust your withdrawal rate downward, since there is no history in withdrawal research assuming for such low returns.
  7. You may want to consider paying off variable debt and consider accelerating fixed debt. For example, with a 10-year treasury at 1.7%, even though the interest rate on your mortgage might be 3.5% you may still be better off paying off the debt because paying off the debt is risk free.
  8. As always, make sure you feel good about your insurance and estate plan, but also think about what low interest rates mean to insurance companies, pensions, and annuities alike. They rely on investment returns themselves to deliver results. If this lasts, are you prepared for the possibility of an insurance premium increase or a pension or annuity change in benefit? This seems like a foreign concept since it’s so rare, but just like the financial planning industry hasn’t seen something like this before, neither has the pension, insurance, and institutional investment community either!

I’m sure there are a number of other issues but initially I think the above gives you a good starting point to create scenarios around this idea.



Finally, if you’d like to read some more about this issue, here’s a good article: “The Titanic Risks of the Retirement System.”

If you don’t have time to read the full article, here’s the best highlight:

“With interest rates extremely low and the prices of stocks and bonds at historic highs, finding safe investments that can help guarantee a comfortable retirement has become increasingly difficult.

“Policy makers and investment managers should consider three fixes. First, be a lot more realistic about the returns that can be achieved within traditional risk tolerance parameters. Second, put in place policies to boost savings and income, so people — particularly the most vulnerable — will have more money available to put aside for retirement. Third, be transparent with retirees about the risks that are being taken on their behalf, also offering less risky options with explicitly lower expected returns.”

Planning in a social science is difficult as it is, especially in a scenario we haven’t seen in our professional lifetime. Ideally this bad case never happens and we’d just be better off. But if it does happen thinking about it today could pay a lot of dividends.

Control for what you can today and plan for things you hope don’t happen.

MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He previously served as lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at

This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services described in this website or that of the author’s.

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