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# 2 Risk and return expectations

One important reason why investors today might not hold the same equity proportion as in 2000 is that the portfolios recommended by Gregory and Rutterford were estimated using historic ten year returns, standard deviations of returns, and correlation coefficients. In other words, their recommended model portfolios were based on what had happened in the 1990s and not on what was expected to happen in the 2000s. That a particular ten-year return is likely to be repeated in the following ten years is highly unlikely. An analyst forecasting ten-year returns would like more than one data point to be confident of his forecast. For example, the Barclays Equity Gilt Study goes back to 1900, which is only 11 or so decades ago. In addition, economic conditions may have changed so that, even with a long historic time series, forecasts of future returns, volatilities and correlations may not be appropriate. Seismic events such as 2008 and 2016 have woken investors up to the fact that risk cannot be measured by volatility alone. Which is why there is much more emphasis on liquidity – is an asset saleable within a reasonable time frame? – and on drawdown - the decline in value from peak to trough over a period - as well as how long a portfolio takes to recover that loss.

The investment management regulator, the Financial Conduct Authority or FCA (previously called the FSA), has recognised that the simple measure, volatility or standard deviation of returns, is not enough to capture the complexity of risk as understood by investors.

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