Want Some Returns? Take More Risks

Want Some Returns? Take More Risks
Theodora Lee Joseph, CFA

over 1 year ago1 min

The odds of a global recession are among the highest they’ve ever been. And there’s some chance that the recession in stock prices might outlast the recession in the economy.

What this means is that it’s going to get harder to generate returns – not just in the next year, but possibly for the next decade. And there are a few reasons for this: high interest rates around the world bode ill for valuations, and the trend of globalization, which has previously driven stronger margins and lower costs, is expected to reverse. What’s more, historical data shows that prior droughts in returns are usually a function of two things we’ve got in spades right now: higher inflation and high market valuation.

The chart above shows the historical relationship between returns and valuation, and at current levels of cyclically adjusted price-to-earnings ratio (CAPE), the projected real returns over the next decade are close to zero. That doesn’t mean you’re better off not investing though. Rather, it’s worth bearing in mind that you may have to take on more risks in order to get higher returns. This could mean investing in emerging economies or in higher beta sectors and assets, or even increasing your exposure to less-liquid alternative asset classes. Whatever it is, the new decade of investing will likely require you to be a bigger risk-taker…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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