Institutional investors commonly target 5% real annual returns, or 7% to 8% nominal returns. At the time this paper was written, however, the authors estimated the prospective real yield on a 60/40 portfolio — 60% equities and 40% fixed income — was less than half that: 2.4%, the lowest in 112 years. Thus, they asserted, traditional allocations were unlikely to achieve 5% real returns in the following 5 to 10 years.
The standard universe of “alternative asset classes” was not likely to fill the gap, they said, because it tends to repeat the problem of concentration in equity risk, just at a higher fee. Despite all of this, the authors said they believe that some investors can still achieve the 5% goal, or at least come closer to it, if they embrace a modest amount of innovation and thoroughly prepare themselves to see it through. Broadly, they recommend:
"No single idea will do the trick," the wrote, "but each of these can help investors get closer to the 5% real-return target."
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