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Book Summary: Investing Amid Low Expected Returns – Making the Most When Markets Offer the Least

As an investor, you’ve no doubt enjoyed the fruits of your investments since the 2008 global financial crisis. Record low interest rates have driven stock markets to new heights, leading to what renowned financial expert Antti Ilmanen calls “excess gains.” But are you prepared for the next chapter in the world of investing?

Ilmanen’s insightful book reveals the reasons behind the good times and helps you navigate the inevitable changes in the market. By understanding the dynamics of changing market conditions, you’ll be better equipped to make informed decisions and safeguard your financial future.


Since the 2008 global financial crisis, investors have had many reasons to feel good. Low interest rates pushed stocks to record levels, leaving investors to reap what financial expert Antti Ilmanen considers “excess gains.” But the good times are coming to an end, Ilmanen warns in this useful study. In a world of higher interest rates, it’s unlikely that investors will continue to enjoy stellar returns. That means they need to start paying close attention to details like diversification and risk management. Ilmanen isn’t predicting a market collapse, but he does want investors to prepare for a challenging future.

Book Summary: Investing Amid Low Expected Returns - Making the Most When Markets Offer the Least


  • Investors need to adapt to a new reality.
  • Low returns pose serious challenges for those saving for retirement.
  • Past performance of equities provides no guarantee of future results.
  • Residential real estate offers false hope to investors seeking a magic bullet.
  • Value investing has fallen on hard times.
  • Investors have moved from active stock picking to passive investing.
  • Investors are rewarded by patience, and yet maintaining patience can be difficult.
  • Portfolio diversification amounts to the proverbial free lunch.
  • Risk gets a bad rap, but proper risk management mitigates the downside of investing.

Investors need to adapt to a new reality.

Individual investors have adjusted their expectations of returns to reflect a climate characterized by rich asset valuations and rock-bottom bond yields. Central banks kept rates low for years, and investors reaped the rewards. The era following the 2008 financial crisis has been one of robust realized returns. But the past is not a perfect roadmap to the future, and investors would be wise to change their expectations and investment strategies. Investors are likely to see lower returns than the ones they experienced in the 2010s.

“Collectively, we are due for a disappointment, as we cannot all buck the fate of lower expected returns.”

The new reality of low returns will pose challenges for investors and savers of all stripes, from sophisticated pension funds to individuals. If returns do indeed revert to the mean, then compounding will become a less powerful force than it has been over the past few decades. The 2010s saw strong investment returns, thanks to low inflation and the growth of the FAMAG (Facebook, Apple, Microsoft, Amazon and Google) platform companies and their monopolies. But a clear pattern has emerged over history, one that sees a decade of strong returns followed by a decade of weak ones.

Low returns pose serious challenges for those saving for retirement.

For American workers, retirement plans fall into one of two basic categories: Defined-benefit (DB) pension plans allow someone else to worry about investment decision-making. A worker contributes a small percentage of compensation, the employer promises a future benefit, and an investment manager figures out how to make the portfolio meet the promise. But today, most workers have defined-contribution (DC) plans, which feature a much harsher calculus. It’s up to the individual not only to save for retirement but also to decide how to allocate investments. If returns languish, DB and DC savers find themselves in different scenarios. Underfunded pension plans often have to chase returns while underfunded individuals simply must work longer and save more.

“If you are an individual DC saver, you must shoulder the investment risk and the longevity risk in pension saving.”

The low-return world became especially stark in 2020 when fixed-income instruments traded at negative yields. The uncomfortable reality was clear: Taking no risk meant watching asset values decline. Investors could generate positive returns with riskier assets but with the obvious downside that adverse outcomes were a very real possibility. Some individual investors began taking risks on the equivalent of lottery tickets – they traded options or speculated on “meme stocks.” But in a world in which investments have delivered returns of 8% to 10% a year for three decades, it’s easy for investors to become complacent about risk and unrealistic about returns.

Past performance of equities provides no guarantee of future results.

US stocks have performed exceptionally well for a long time. From 1900 to 2020, US stocks generated real returns of 6.6%, well above the 4.5% returns of other nations’ stock markets. That strong performance includes the 84% decline in stocks during the Great Depression. Stock valuations represent the discounted value of future cash flows, and this discount rate keeps falling. That reality has contributed strongly to the large gains enjoyed by equity investors. However, there’s no guarantee that these windfall gains will continue.

“Few investment opportunities are as old as gold.”

Commodities faced headwinds in the 2010s, an era of low inflation. Perhaps the oldest commodity is gold. The precious metal continues to hold appeal as a store of value, even if it generates no cash flows or dividends. Even so, the value of all gold stores as of 2021 was $17 trillion while the much newer alternative to fiat money, cryptocurrency, was worth a combined $2 trillion in 2021. Gold tends to perform well in inflationary periods and bear markets for stocks, and it remains a favorite of investors preparing for doomsday scenarios.

Residential real estate offers false hope to investors seeking a magic bullet.

What about housing as a solution to savers’ investment challenges? One widely noted study in 2019 argued that residential real estate has produced long-term results similar to stocks but with less downside risk. Slicing and dicing returns from 16 nations, the authors concluded that homes returned 7.26% annually, compared to 6.67% for stocks. But the findings proved contentious. Housing experiences less volatility in part because of its illiquidity – any given property is marked to market only occasionally. What’s more, the study overlooked the inevitable decline in the quality of a house over time.

“Unfortunately, the current generation of real estate investors may extrapolate past decades’ generous returns.”

A more sober look at housing suggests that it’s no magic solution to the conundrum of low returns. While the value of the land under a house remains steady, the house itself is an ever-depreciating asset. Houses require constant repair and upkeep, and eventually they have to be torn down and rebuilt. Rental income isn’t all gravy, either – a significant portion of rental income covers the landlord’s costs, plus the intangibles of headaches from managing a property and the risk of occasional declines in real estate values.

Value investing has fallen on hard times.

Value investing is a contrarian strategy, one that seeks out underpriced stocks that have been overlooked by the market. Value investors focus on metrics such as book/price ratios to find bargain stocks. In other cases, investors simply buy assets that have underperformed over a given period of time, with the idea that those assets are due for a rebound. The reasons that markets undervalue certain companies are up for debate, but value investors generally believe that excess profits enjoyed by growth-stock companies ultimately will self-correct.

“Stock selection value strategies performed very poorly between 2018 and 2020, raising investor doubts about these strategies’ long-run viability.”

Value investing was a profitable pursuit for many decades, but the style fell out of favor during the 2010s. The rout was total and complete; value investing failed in all corners of the globe and across most sectors. And value-investing flops were limited not just to picks based on book/price ratios but on all types of value strategies. Growth stocks simply overpowered value stocks, seemingly ending the old debate about growth versus value as viable strategies. However, it might be too soon to rule out value investing. Markets tend to embrace the idea that “this time is different,” and yet fundamental strategies such as bargain hunting endure.

Investors have moved from active stock picking to passive investing.

In recent decades, low-cost index funds, and especially exchange-traded funds, have become wildly popular. Instead of attempting to pick individual stocks or hiring managers to select stocks, investors increasingly have turned to letting an index do the work for them. In 2007, passively managed mutual funds accounted for 19% of market share, according to Morningstar. By 2021, that share had risen to 50%. The tide toward index-based investing is based in part on the reality that active managers struggle to pick winners at a pace that justifies their fees.

“The conventional wisdom is that while markets are not perfectly efficient in the sense that market prices are always right, beating the market is really hard.”

Even superstar active managers owe some of their wins to the broader trends on which passive investors rely. Warren Buffett is a hugely successful value investor, and clearly his expertise is responsible for some part of his market-beating performance. But on balance, Buffett owes more of his long-term returns to mere market exposure than to his contrarian plays. George Soros has produced even less of a return beyond the usual benchmarks: His Quantum fund benefited to an even larger extent from market exposure during a time of rising asset values.

“Overall, investor choices on trading activity and on active versus passive management appear more faith-based than evidence-based.”

Still, investors seem to have embraced the low-fee ethos of passive investing a bit too exuberantly. Investors should keep their focus on maximizing returns rather than minimizing fees. The broad shift to index funds has been somewhat offset by inflows to managers of hedge funds and private equity funds, both high-fee endeavors involving active management. The most revered hedge fund managers continue to command fees of 2% of assets and 20% of performance. But there’s no question that management fees have trended sharply down. Passively run funds typically charge less than 30 basis points, while actively managed stock funds impose fees of 30 to 80 basis points.

Investors are rewarded by patience, and yet maintaining patience can be difficult.

Investors know that they should be patient, and yet many find it all but impossible to stay the course when markets don’t perform as they hope. Nobel laureate Daniel Kahneman delved into the behavioral issues that plague many investors. He noted that they make long-term investments but expect short-term results. When those results fail to materialize, investors lose patience. By churning in and out of investments, they all but guarantee poor returns. Many investors struggle to stay the course for even three to five years, much less for longer periods of time.

“Patience is a virtue also in investing – and one that is hard to sustain.”

Investors are wise to simply tune out performance. To return to Buffett, his Berkshire Hathaway beat the S&P 500 by an average of 9.5% per year for four decades. Yet even Buffett had three-year periods of poor performance. Indeed, Buffett’s three-year record was unimpressive fully 30% of the time. But investors who were patient and held on through such periods enjoyed stellar returns over the long term. A paradox of risk aversion is that by selling too quickly and avoiding losses, investors actually reduce their ability to meet their long-term goals. In fairness, there is such a thing as too much patience – investors can and do stick too long with poor managers or losing strategies. For the most part, though, investors would be wise to hold on through tough times and review their portfolios only sporadically.

Portfolio diversification amounts to the proverbial free lunch.

Properly spreading a portfolio’s holdings is a way to both boost returns and mitigate volatility. A common example is the 60-40 split of stocks versus bonds. Geographic diversity also is often overlooked; while US-heavy portfolios did well in the 2010s, it seems wise to assume that globally diversified portfolios will perform in the future. Investors should aim to diversify risk strategically rather than try to time their purchases. Sophisticated diversification strategies build in long/short plays as well. What’s more, it’s important for investors to rebalance across asset classes to prevent the best performers from dominating the portfolio.

“Many investors talk diversification but walk concentration.”

While diversification is a powerful tool, it certainly has its detractors. Some decry it as “deworsification,” or moving money out of winning asset classes into poorer performing ones. While that criticism is misguided, there are downsides to diversification. One is that sophisticated diversification strategies involve leverage, an inherently risky approach. An overlooked risk is that aggressively diversifying means you’re no longer following the crowd. If things go wrong in the portfolio, the investor can feel as if he or she is “losing alone.” What’s more, humans love stories, and diversification strategies tend to be based on statistical evidence rather than easily grasped narratives.

Risk gets a bad rap, but proper risk management mitigates the downside of investing.

Investors need to manage risk, an oft-misunderstood concept. For most investors, the most basic edict is survival – to make it through a major downturn, such as the 1970s stagflation or the 2008 financial crisis. Investors also need to be cautious about strategies that involve limitless downsides. These include shorting stocks and selling naked calls. Basic risk management strategies help investors rule out the most catastrophic scenarios. One hallmark of diversification and rebalancing, for instance, is limiting the size of any single position. Hedging strategies and insurance can allow investors to offset specific risks.

“Although the word risk has negative connotations, successful risk management can go beyond risk reduction and also enhance long-run returns.”

Risk isn’t all bad. For instance, leverage has a tarnished reputation because of infamous episodes such as the Long Term Capital Management crash in 1998 and Lehman Brothers’ collapse in 2008. When leverage involves risky assets, concentrated positions and illiquidity, disaster can ensue. But the truth is that leverage can help boost portfolio returns. The key is to make sure that leverage is meticulously managed so that the investor isn’t stuck with highly leveraged, illiquid assets when the market turns. Options and other flavors of risk protection allow investors to use leverage responsibly.

About the author

Antti Ilmanen is principal and global co-head of the Portfolio Solutions Group at AQR Capital Management. He is the author of Expected Returns and holds a PhD in finance from the University of Chicago.


Finance, Nonfiction, Economics, Personal Investing, Business, Personal Finance

Table of Contents

Foreword by Cliff Asness xiii

Part I: Setting the Stage 1

Chapter 1 Introduction 3
1.1. Serenity Prayer and Low Expected Returns 3
1.2. Outline of This Book 6
1.3. On Investment Beliefs 11

Chapter 2 The Secular Low Expected Return Challenge 15
2.1. Broad Context 15
2.2. Rearview-Mirror Expectations, Discount Rate Effect, and Low Expected Returns 17
2.3. How Low Are “Riskless” Long-term Yields from a Historical Perspective? 21
2.4. Decadal Perspective on Investment Returns 24

Chapter 3 Major Investor Types and Their Responses to This Challenge 27
3.1. Three Broad Investor Types 28
3.2. History of Institutional Asset Allocation 33
3.3. How Has the Low Expected Return Challenge Hurt Various Investor Types? 42
3.4. How Are Investors Responding to the Low Expected Return Challenge? 45

Part II: Building Blocks of Long-Run Returns 49

Chapter 4 Liquid Asset Class Premia 51
4.1. Riskless Cash Return 52
4.2. Equity Premium 55
4.3. Bond Risk Premium 69
4.4. Credit Premium 74
4.5. Commodity Premium 81

Chapter 5 Illiquidity Premia 87
5.1. Illiquid Alternative/Private Assets 88
5.2. Less Liquid Public Assets 101
5.3. Liquidity Provision Strategies 102

Chapter 6 Style Premia 105
6.1. Value and Other Contrarian Strategies 109
6.2. Momentum and Other Extrapolative Strategies 117
6.3. Carry and Other Income Strategies 124
6.4. Defensive and Other Low-Risk/ Quality Strategies 131

Chapter 7 Alpha and Its Cousins 139
7.1. Alpha and Active Returns 139
7.2. Reviewing the Classification of Portfolio Return Sources 146
7.3. Demystifying Hedge Funds, Superstars, and Other Active Managers 147

Chapter 8 Theories Explaining Long-run Return Sources 151
8.1. Rational Reward for Risk or Irrational Mispricing? 152
8.2. “Bad Returns in Bad Times” at the Heart of Risk Premia 153
8.3. Other Core Ideas for Rational Risk Premia and Behavioral Premia 155
8.4. Who Is on the Other Side? – and Related Crowding Concerns 158

Chapter 9 Sustaining Conviction and Patience on Long-run Return Sources 163
9.1. Patience: Sustaining Conviction When Faced with Adversity 164
9.2. Economic Rationale – and Has the World Changed? 169
9.3. Empirical Evidence – and Data Mining Concern 170

Chapter 10 Four Equations and Predictive Techniques 173
10.1. Four Key Equations and Some Extensions 173
10.2. Overview of Predictive Techniques 180

Part III: Putting It all Together 185

Chapter 11 Diversification – Its Power and Its Dark Sides 187
11.1. Outline of the Remainder of This Book 187
11.2. Ode to Diversification 188
11.3. Critics’ Laments 193

Chapter 12 Portfolio Construction 195
12.1. Top-down Decisions on the Portfolio 195
12.2. Mean-variance Optimization Basics and Beyond 200
12.3. Pitfalls with MVO and How to Deal with Them 204

Chapter 13 Risk Management 207
13.1. Broad Lens and Big Risks 208
13.2. Techniques for Managing Investment Risk 209
13.3. Managing Tail Risks: Contrasting Put and Trend Strategies 210
13.4. Managing Market Risks: Portfolio Volatility and Beyond 214

Chapter 14 ESG Investing 219
14.1. Booming ESG 220
14.2. How Does ESG Affect Returns? 221
14.3. ESG Impact of ESG Investing – a Case Study on Climate Change 224

Chapter 15 Costs and Fees 225
15.1. Trading Costs 226
15.2. Asset Management Fees 230

Chapter 16 Tactical Timing on Medium-term Expected Returns 235
16.1. Contrarian Timing of the US Equity Market 235
16.2. Beyond Contrarian Timing of Equities: Other Assets and Factors, Other Predictors 240

Chapter 17 Bad Habits and Good Practices 243
17.1. Multiyear Return Chasing 244
17.2. Other Bad Habits and Good Practices 246

Chapter 18 Concluding Remarks 249

Acknowledgments 253
Author Bio 255
Acronyms 257
References 259
Index 277
3.1 Global Market Portfolio 39
4.1 A Brief History of Inflation 54
4.2 Weak Empirical Relationship Between GDP Growth and Equity Returns 67
5.1 Share of Illiquid Assets in Global Wealth 89
5.2 Calendar Strategies 103
6.1 The Size Premium 107
7.1 Systematic Versus Discretionary Investing 142
8.1 How to Make Sense of Flow Data When Every Buyer Has a Seller 161
10.1 Machine Learning 183
11.1 Rebalancing 192
12.1 Modern Portfolio Theory and Two-Fund Separation 202
13.1 Can Risk Management Enhance Returns? Volatility Targeting 216
15.1 Taxes 233


Elevate your game in the face of challenging market conditions with this eye-opening guide to portfolio management

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least provides an evidence-based blueprint for successful investing when decades of market tailwinds are turning into headwinds.

For a generation, falling yields and soaring asset prices have boosted realized returns. However, this past windfall leaves retirement savers and investors now facing the prospect of record-low future expected returns. Emphasizing this pressing challenge, the book highlights the role that timeless investment practices – discipline, humility, and patience – will play in enabling investment success. It then assesses current investor practices and the body of empirical evidence to illuminate the building blocks for improving long-run returns in today’s environment and beyond. It concludes by reviewing how to put them together through effective portfolio construction, risk management, and cost control practices.

In this book, readers will also find:

  • The common investor responses so far to the low expected return challenge
  • Extensive empirical evidence on the critical ingredients of an effective portfolio: major asset class premia, illiquidity premia, style premia, and alpha
  • Discussions of the pros and cons of illiquid investments, factor investing, ESG investing, risk mitigation strategies, and market timing
  • Coverage of the whole top-down investment process – throughout the book endorsing humility in tactical forecasting and boldness in diversification

Ideal for institutional and active individual investors, Investing Amid Low Expected Returns is a timeless resource that enables investing with serenity even in harsher financial conditions.

* * * * *

In Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least, renowned institutional investor advisor Dr. Antti Ilmanen delivers a timeless―and timely―treatment of strategic investment processes in times of low returns.

The author outlines the low expected return challenge now facing investors due to the past four-decade stretch that has seen markets with ever-increasing valuations and realized returns with falling yields. Assuming high realized returns will persist, especially in an era of low starting yields, is therefore complacent.

The key building blocks to improving long-run returns―including major asset class premia, illiquidity premia, style premia, and the always elusive alpha―are discussed as well, with extensive empirical evidence used to bolster the book’s exploration of the most reliable sources of investment returns.

Readers will learn how to construct an efficient portfolio from these building blocks as well as how to manage risk and control costs, informed by detailed descriptions of competing investment models and best practices amongst large institutional asset owners.

Perennial investing topics are explored at length, with fulsome discussions of the pros and cons of liquid vs. illiquid investments, active vs. passive management, as well as the merits of factor investing, ESG investing, macro-resilient portfolios, and tail hedging. Humble forecasting and bold diversification are emphasized throughout the book, as is the need for a combination of good investments with a patient approach.

With a foreword by Cliff Asness, managing and founding principal at AQR Capital Management, Investing Amid Low Expected Returns is a can’t-miss resource for institutional investors and active individual investors seeking an authoritative and eye-opening treatment of intelligent investing principles in the context of diminishing returns.


“Call it secular stagnation, low neutral rates or hyper liquidity, we are in a very different interest rate era than most of us grew up in. Few, if any, financial questions are more important than what it all means for investment strategy. This important book is the best take that has yet appeared.” ― LAWRENCE H. SUMMERS, Charles W. Eliot University Professor and President Emeritus at Harvard University, Former Secretary of the Treasury and Director of the National Economic Council

“Don’t let the title sway you, this book is foundational investing in every return environment. It is filled with solid investment wisdom that will help all investors build a resilient portfolio and stay the course. The core tenets of investment beliefs, portfolio construction, managing risks, and minimizing costs have withstood the test of time. This is a book for all markets and all investors.” ―CHRISTOPHER AILMAN, Chief Investment Officer, CalSTRS

“Antti has earned the right to be called one of investing’s great practical empiricists. If a research paper has value, he has found it and incorporated it into his comprehensive, well-structured toolkit. He clearly states what is known well and where humility is required. Investment practitioners everywhere need this book.” ―JASE AUBY, Chief Investment Officer, Teacher Retirement System of Texas

“Timeless advice for uncertain times. A rare combination of being both erudite and accessible.” ― EDWIN CASS, Chief Investment Officer, Total Fund Management, Canada Pension Plan Investment Board

“Antti has written an important book addressing the most critical challenge to investing for retirement – low prospective returns for the key asset classes. Reviewing extensive histories with humility and experienced judgment, Antti comes up with a balanced and yet optimistic outlook. Reasonable return streams remain for investors to diversify into; however, patience and good risk control will be required. This book is an encouraging read for investors!” ― JEFFREY PICHET JAENSUBHAKIJ, Group CIO, GIC

“I often describe Antti’s previous book, Expected Returns, as the encyclopedia of empirical research of investment management. More than a decade later, Antti has once again written the quintessential guide to navigating the challenging low-return and high-volatility market environment that may lie ahead. He shares his deep understanding and insights into the various components driving returns and provides a clear framework to guide investors in constructing a portfolio to weather the storm.” ― YU (BEN) MENG, Chair of Asia-Pacific of Franklin Templeton and former CIO of CalPERS

“Antti provides a vital update to the canonical toolkit he presented in Expected Returns. The new book has even broader coverage, yet is more succinct. Investors who read this book will leave with a straightforward risk-return framework, a well-considered set of investment beliefs, a list of bad habits to avoid, and empirically good practices to follow. This book is the foundation of solid portfolio management for institutional and retail investors.” ― LARRY SWEDROE, Chief Research Officer, Buckingham Wealth Partners

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