Expected Returns: An Investor's Guide to Harvesting Market Rewards

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Takeaways for long-horizon investors

• There are many ways to improve investment practices to enhance long-run returns. Several can be pursued in parallel: collect risk premia from diverse sources; benefit (in moderation) from illiquidity premia, leverage, contrarian timing, and view-driven active management; be aware of risks and costs as well as own natural edges and limitations.

• Equity and illiquidity premia are good return sources but should not dominate the portfolio, especially when their ex ante rewards are slim. Entry and exit valuations matter.

• Returns may be enhanced by exploiting value, carry, and momentum tilts; valuation-based timing of any return source; and view-based alpha seeking.

• Prudent leverage enables effective diversification and helps investors avoid overpriced high-volatility assets.

• Do not seek comfort by avoiding leverage or headline risk while buying popular assets or lottery tickets. These errors hurt long-run performance.

• Long-horizon investors have certain comparative advantages that they should fully exploit.

In this “takeaways” chapter, I summarize theories about expected return determination, list which plausible sources of expected returns have and have not worked in practice, and address several relevant debates among investors. Institutional practices have already evolved from 60/40 local market stock/bond portfolios to globally diversified portfolios, often including emerging markets and alternative assets. The “Yale” or endowment ...