Investing and the Serenity Prayer
God, grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference.
How are you feeling right now about investing? What words come to mind? With both U.S. stocks and bonds down double-digits since the first of the year, I’m guessing that words like Peace or Contentment did not immediately jump to your mind. Maybe words like Anxious or Uncertain are closer to the mark.
The period since the end of the Global Financial Crisis (GFC), from 2007 to 2009, witnessed extraordinary efforts by global central banks to lower interest rates and flood economies with liquidity, which were extremely supportive of equity markets. In his latest book, Investing Amid Low Expected Returns, Antti Ilmanen, PhD., a well-respected author and researcher at the investment firm AQR Capital Management, describes the period since the GFC as “a time of low growth, low inflation, low interest rates – low everything except realized investment returns.” Indeed, since the beginning of 2012 through 2021, the S&P 500 Index (composed of mostly large cap stocks) returned a compounded annualized return of 14.2%, much higher than the historical average return.
Many investment firms are now warning investors to expect lower returns from stocks in the years ahead. A recent sampling of 10-year future expected returns published by some well-known investment firms estimate annual nominal (not inflation adjusted) returns for U.S. stocks in a range from a low of 2.6% to a high of 5.9%. While we should always take such predictions with a grain of salt, it makes sense that we should certainly ratchet down our expectations from that 14% per year we’ve enjoyed for the past 10 years.
One explanation for lower equity return expectations comes from the investment firm Alliance Bernstein. Taking a longer frame of reference, beginning in 1981, they point out the benefits of falling inflation and interest rates, globalization, growing populations and the widespread application of computer automation. This drove strong equity and bond returns. They put these macro trends together in an interesting graphic, pivoting around the year 2000:
According to Alliance Bernstein, the “tailwinds” that propelled economic growth from 1981 to 2000 are now giving way to the “headwinds” of de-globalization, falling population growth, rising interest rates, higher inflation, and higher sovereign debt levels. All of these will weigh on future global growth to some degree, not to mention the ongoing effects of the COVID-19 Pandemic and the Russian invasion of Ukraine. Lower global growth implies lower investment returns, at a macro level at least.
In the introduction to his book, Dr. Ilmanen discusses the prospects of a low-return investment future in the context of the Serenity Prayer. He writes, “Few investors have shown the ‘serenity to accept’ the lower expected returns in the sense of moderating their future spending plans. Many more have shown ‘the courage to change’ in moving into riskier investments when the market no longer offers the expected returns these investors have grown used to.”
David Booth, founder of Dimensional Fund Advisors, speaks to this last point when he writes, “Contrary to what Wall Street wants you to think, there is no method of analysis, no matter how ‘proprietary’ or sophisticated, that tells us what’s going to happen when.” Constantly changing your investments to chase after the latest fad, hot stock tip, highest-performing fund, or highest yielding security is a loser’s game. Booth concludes:
The market can reward us for having faith in our fellow human beings. Investing—like life—is full of uncertainty, but at the end of the day, it’s uncertainty that drives opportunity, and returns. Investing is not about trying to outguess Wall Street or meme investors on which stock will go up or down and when. It’s about choosing to side with human ingenuity and betting on a future that’s better than today—because of the hard work of everyone you know, and the many millions you will never meet.
Ilmanen correctly summarizes all this: “Investing with serenity is not only about calmly accepting low returns [i.e., lower than 14% per annum over the next 10 years]. It is about investing thoughtfully, understanding one’s investment goals, and figuring out best ways to reach them.” I would quickly add that serenely accepting market volatility like we are seeing this year is never easy, but it helps to have a long-term perspective. This is not the first time we’ve seen such volatility, nor will it be the last.
As we’ve mentioned before, your investment plan structure is the key.
It is based upon providing for your needs over the long term with the understanding and expectation that such volatility will always be with us.
Your confidence in this structure should, we hope, continue to help you weather such periods with perhaps less anxiety, or, who knows, even a bit of serenity.
John Finley, CFA, serves as Chief Investment Officer for Coyle Financial Counsel and is responsible for overseeing the investment process. John’s prior experience includes managing institutional fixed-income portfolios for corporations, pension funds, non-profit organizations and foundations at several large, global asset managers. With more than 20 years of institutional investment experience, he is energized by helping individuals understand the role investing plays in meeting their long-term financial goals.
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Investing Amid Low Expected Returns, Antti Ilmanen, Wiley (2022)
 Alliance Bernstein Webinar, Market Insights-Disruptor Series, “Life on the Other Side” (Viewed 6/8/22)
 “Meme Investing? Try Human Ingenuity Instead”, David Booth, Dimensional Fund Advisors, 3/28/22
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