Key Points

  • Portfolios dominated by mainstream asset classes have a very low probability of earning a 5% annualized real return over the next decade, but most investors are blithely overlooking this reality.
  • A comparison of the most popular investing strategies used to build retirement nest eggs suggests the chances of any producing a 5% annualized real return for investors over the next decade is quite slim. Portfolio alpha and/or alternatives allocations are unlikely to change this conclusion.

Now’s the time to get real. Now’s the time, in a world of paltry bond yields and meager dividends, to make an honest assessment of your portfolio’s long-term expected return. We encourage you to take the 5% Challenge by visiting our website where you can create a portfolio using our interactive portfolio builder to replicate your current allocation or a contemplated allocation. What are the odds your portfolio will earn an annualized real return of 5% over the next decade?

A Lesson from Lloyd
In a fast-paced life, John and his wife often enjoy some mindless entertainment downtime. No suspense. No sophisticated plot. No worldly foreign-language subtitles. Just…mindless. And it would be hard to get much more mindless than the Farrelly brothers whose signature movie Dumb and Dumber always seems to be on cable during the downtime hour. In this 1994 comedy, two nitwits—Lloyd Christmas and Harry Dunne, played by Jim Carrey and Jeff Daniels, respectively—follow beautiful Mary Swanson (Lauren Holly) to Aspen after limo-driver Lloyd falls in love with her on an airport drop-off.

After the requisite road trip hi-jinks, Lloyd finally catches up to Mary in Colorado and gets the nerve to ask her his chances. The conversation goes like this:

Lloyd Christmas (Jim Carrey): What do you think the chances are of a guy like me and a girl like you…ending up together?

Mary Swanson (Lauren Holly):  Not good.

Lloyd: You mean, not good like one out of a hundred?

Mary: I’d say more like one out of a million.

Lloyd: So you’re telling me there’s a chance. Yeah!1

Now that’s truly looking at life through rose-colored glasses!

We have to say we see a lot of similarities between Lloyd’s unfounded optimism and that of many investors in believing their mainstream portfolios will hit their targeted long-term return—for many, a real 5%. As Mary Swanson clearly told Lloyd, chances of reaching that return are “not good.” Instead of taking action, most investors ignore this seemingly straightforward conclusion. Like Lloyd Christmas, they don’t care if the probability of failure is high. A miniscule chance is good enough. Worse yet, many investors attempt to close the gap by making alpha bets, exposing their portfolios to the return-eroding performance chasing that so often goes hand-in-hand in such a pursuit.