Callan Associates is out with surprising new research that finds that 401(k) savers and investors must take on three times the risk to get the same level of return when compared with a generation ago.
“Interest rates are historically low in the U.S. and abroad,” according to the research and consulting giant. “Couple this with modest growth, and fund sponsors reluctant to lower return expectations face one of the most difficult investing environments in history.”
To find out how difficult, Callan experts wondered, “What would an investor need to do to achieve a 7.5 percent return with the least amount of risk possible?”
Using Callan’s capital market projections, the company found that investors in 2015 needed to take on three times as much risk as they did only 20 years ago.
“Return-seeking portfolios are now more complex and expensive than ever,” it reports. “Whereas in 1995 a portfolio made up entirely of fixed income was projected to return 7.5 percent, by 2015 to achieve comparable returns that fixed income portion was down to just 12 percent%, with private equity and stocks making up around three-quarters of the portfolio.”
“A better way of saying it is that many investors are reaching for risk in order to achieve return expectations that they are unwilling to lower,” said Jay Kloepfer, Callan’s executive vice president and director of Capital Market and Alternatives Research, when asked if investors are taking on more risk, complexity, and expense for lower returns.”
Were they at all surprised by the results?
“Yes and no,” Julia Moriarty, CFA, senior vice president of Capital Markets Research, explained. “We were fairly certain that plans had to increase risk when they were reluctant to lower their expected return. With the decline in interest rates, and bond yields correspondingly falling, plans have to take on more risk in the form of equities and illiquid investments to achieve the same expected return.
However, she said they was surprised “at the size of the shift in the model portfolio’s assets. To see the decline from 100 percent fixed income to 52 percent to 12 percent—the magnitude was surprising.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
