Investors can expect low returns for 20 to 30 years — report

Worldwide investment returns for the next 20 to 30 years are likely to be considerably lower than the annualized returns since 1950, with low real interest rates resulting in low subsequent equity returns, according to an annual report by the London Business School and Credit Suisse.

Estimated annualized worldwide real returns for the next 20 to 30 years are around 3% to 4% for equities and less than 1% for bonds. In contrast, the annualized real returns of equities and bonds since 1980 were each more than 6%. Since 1950, those real-return numbers are about 7% for equities and less than 4% for bonds, according to the Credit Suisse Global Investment Returns Yearbook 2013 by London Business School authors Elroy Dimson, Paul Marsh and Mike Staunton.

The report said the top concern for institutional investors last year was the low-return environment, but many institutions still seem to be in denial with long-term target returns of 6 to 8 percentage points above inflation.

“Such aims are unrealistic in today's low-return world,” the report states.

It adds pension plans also are too optimistic, especially in the U.S. The average expected return at S&P 500 companies has dropped to 7.6% from 9.1% a decade earlier, but the authors argue that is still too high.

Bond returns are expected to decrease as well, imposing further stress on investors. The report said it could take another six to eight years for short-term real interest rates to turn positive and that markets suggest a drift to the long-run average of 0.9% real interest rates for the U.S. and U.K., rather than reaching the high levels since 1980.

“To extrapolate the high bond returns of the last 30 years into the future would be fantasy,” the report states.