Research Affiliates: Negative Rates Are Dangerous To Your Wealth

April 18, 2016

What Risk?

To accurately answer the preceding question, we must define risk. Volatility is not the only—or even the most relevant—measure of risk. For long-term investors, risk is more about failing to meet wealth accumulation goals than about short-term changes in the price of a portfolio. A better measure of risk than annual volatility is the estimated probability of reaching or failing to reach the desired or, more important, needed long-term real return level.

Using our estimates of risks and returns, investors in the Maverick portfolio should be 95% confident of reaching or exceeding an annualized 10-year real return of 1.3%. In contrast, investors in the 60/40 portfolio have a 50% probability of failing to exceed a 10-year real return of 1.3%. From this perspective, such a high probability of low or zero real returns is not low risk! For the long-term investor, the 60/40 portfolio presents the highest risk of failing to accumulate wealth.

Why does the 60/40 portfolio seem safer? This traditional investment portfolio protects the investor from having to accept maverick risk—a conceptually uncomfortable position for many investors. As John Maynard Keynes wrote in 1935 in his well-known tome Theory of Employment, Interest, and Money, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

We will have more to say about maverick risk in forthcoming articles and in the information provided on our Asset Allocation site in the months ahead.


  1. The European Central Bank announced a −0.10% deposit rate on June 12, 2014 (and as of March, 10, 2016 the rate stands at −0.40%), and the Bank of Japan announced a −0.10% current account rate on January 29, 2016, that became effective on February 16, 2016.
  3. In this article, we use our 10-year real return forecasts available to all on our interactive Asset Allocation site.


The material contained in this document is for general information purposes only. It is not intended as an offer or a solicitation for the purchase and/or sale of any security, derivative, commodity, or financial instrument, nor is it advice or a recommendation to enter into any transaction. Research results relate only to a hypothetical model of past performance (i.e., a simulation) and not to an asset management product. No allowance has been made for trading costs or management fees, which would reduce investment performance. Actual results may differ. Index returns represent back-tested performance based on rules used in the creation of the index, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are not managed investment products and cannot be invested in directly. This material is based on information that is considered to be reliable, but Research Affiliates® and its related entities (collectively "Research Affiliates") make this information available on an "as is" basis without a duty to update, make warranties, express or implied, regarding the accuracy of the information contained herein. Research Affiliates is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. The information contained in this material should not be acted upon without obtaining advice from a licensed professional. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisors Act of 1940 with the U.S. Securities and Exchange Commission (SEC). Our registration as an investment adviser does not imply a certain level of skill or training.

Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third party vendors, the construction of model portfolios, and in coding related to the index and portfolio construction process. While Research Affiliates takes steps to identify data and process errors so as to minimize the potential impact of such errors on index and portfolio performance, we cannot guarantee that such errors will not occur.

Research Affiliates is the owner of the trademarks, service marks, patents and copyrights related to the Fundamental Index methodology. The trade names Fundamental Index®, RAFI®, the RAFI logo, and the Research Affiliates corporate name and logo among others are the exclusive intellectual property of Research Affiliates, LLC. Any use of these trade names and logos without the prior written permission of Research Affiliates, LLC is expressly prohibited. Research Affiliates, LLC reserves the right to take any and all necessary action to preserve all of its rights, title and interest in and to these terms and logos.

Various features of the Fundamental Index® methodology, including an accounting data-based non-capitalization data processing system and method for creating and weighting an index of securities, are protected by various patents, and patent-pending intellectual property of Research Affiliates, LLC. (See all applicable US Patents, Patent Publications, and Patent Pending intellectual property located at, which are fully incorporated herein.)

The views and opinions expressed are those of the author and not necessarily those of Research Affiliates, LLC. The opinions are subject to change without notice.

©2016 Research Affiliates, LLC. All rights reserved.

Chris Brightman, Chief Investment Officer, Research Affiliates, LLC


Find your next ETF

Reset All