Gut Check Needed


June 20, 2016

All experienced investors understand the trade-off between risk and reward. We expect that higher risk investments will yield higher rates of return. I believe that every investor has an innate opinion, or as I like to call it, a “gut check feel”, for the level of return they need for the risks they take. One investor might need a 6% return in order to make an investment with a certain level of risk, while another might only need a 4% return from the same investment. There is no right or wrong answer, but this is an essential discussion when assessing the risk an investor should be taking.

This week an international investment firm, Schroders, published survey results of global investors’ expectations of returns and income for retirement funds. The survey question was simple. “When thinking about the income from your investments (excluding cash and property) what is the minimum level of income you would like to receive?” The responses were surprising.

The average expectation of the minimum return was a remarkable 9.1%. As you might expect, American investors were the most aggressive expecting an 11.1% return. European investors wanted 7.9%, and Asian investors 9.7%. Such lofty return expectations would suggest that our global investors are quite the risk takers, but the survey participants seemed to believe that 9% is obtainable with little or no risk. It would also appear that our global investor sample does not believe in the need to be a long-term investor. Fewer than 20% of the surveyed respondents stated that they hold assets longer than 5 years.

So investors across the globe want high returns earned over the short term with limited risk. As you know, the current performance of the major markets falls far short of delivering against this type of wish list. The gap between what is wanted and what is realistically available will be a driving issue as the markets trade going forward. The search for return and yield will force investors to seek new opportunities and markets to place money. Unrealistic desires of return usually force investors to take on greater risk than they would like, which can lead to dire consequences.

Recent returns for some of the smartest and best managed money in the world seem to confirm the problem facing our global investor. David Swensen, who runs the endowment for Yale, is arguably one of the best minds in the current investment world having generated 10% annual returns for the last ten years. However, the Yale endowment is hardly safe, and it is highly illiquid. The 9.1% return for our global investor strikes me as a bit too optimistic, but maybe all the surveyed group that participated in the Schroder study are graduates of Yale.

Carl Gambrell