We live in interesting times. Who would have thought back in the 1990s or even as recently as 2007 (before the global financial crisis) that investors would be happy with a paltry 0-2% yield on the money they lend to governments?

And yet yields on many European Government Bonds are at (or very close to) their lowest levels ever (http://yhoo.it/1t9AeaG) . German 10 year bonds are offering investors less than a 1% return compared with around 4%-5% before the global financial crisis.

Japanese yields are at record lows and USA yields are close to record lows.

In September, the Economist published, “What does a low yield mean?” (http://econ.st/1wBEylw) This is not only relevant for bonds, but also for other asset classes. Yields on equities (i.e. the dividend yield, which is the dividend divided by the share price) are also at very low levels; the average yield on US equities has been about 2% since the mid-1990s – compared to the long-term average of 4% since 1900.

The article distinguishes between nominal yields and real yields – i.e. after adjusting for inflation. Are these low nominal yields indicating an expectation of very low inflation, in which case real yields would still be significant?

We don’t know.

But a key warning to investors is that low yields typically imply low future nominal and real returns as was the case for US equities in the 1960s and early 1970s, despite the low levels of inflation.

Ray Dalio, founder of the world’s largest hedge fund, indicated in the Economist article  (http://econ.st/1wBEylw)that “likely future real returns from a stock/bond portfolio may be barely positive”.

If the balance of probability is that future long-term real returns are likely to be lower than the past (“barely positive”?), then investors should be even more vigilant in protecting their scarce returns and should ensure fees are kept to the absolute minimum.

At Stylo, we do not make market predictions or forecasts. We don’t comment on or subscribe to economic views. We don’t try to time markets. We just build sensible, diversified portfolios using low-cost investment building blocks.

The long-term historic real returns have been achieved with average yields significantly higher than current yields.