Risk & return in a changing investment environment


9 min.

As the investment landscape evolves, new trends, asset classes, and a changing macroeconomic environment alter traditional investing norms. So when it comes to achieving investment goals, it’s beneficial to understand how these factors influence different asset classes.

To give you more insight into this, we’ve highlighted the risks and returns of some income-producing asset classes: stocks (equities), real estate (including REITs), bonds, and loans. Then for comparison, we’ve summarized the risk and return of a high-profile non-income-producing asset: cryptocurrency.

Risk and return: income-producing assets

Stocks (equities)

Stocks continue to be a go-to asset class for global investors. With above-average returns and multiple exchanges valued in the trillions, this asset class has stood the test of time. Since 2007, the compound annual growth rate (CAGR) of stocks is around 9% (based on the MSCI World Index)1.

Using the CAPE (or the Shiller P/E) ratio to analyze stock performance

The CAPE (cyclically adjusted price-to-earnings) ratio assesses a company’s long-term financial performance. Most investors use it as an indicator of how much a company’s stocks are under or overvalued. Simply put, it reflects how much an investor is willing to pay for $1 of a company’s earnings. To calculate it, you compare the price of a stock to its previous 10-years of earnings per share and adjust for inflation.


Can past performance predict future returns? 
Although the CAPE ratio is a backward-looking tool, it considers the effects of different economic cycles, creating a reasonably accurate picture of stock performance2. This accuracy has led to the CAPE ratio being useful for forward-looking predictions, as research shows that stocks with lower CAPE ratios tend to earn higher future returns2. However, it’s important to note that there are limitations to the accuracy of the ratio over longer periods, as the structure of earnings information and accounting standards changes over time.

When assessing the US stock market (the largest stock market value-wise), you can see that the CAPE ratio has been steadily increasing since the global financial crisis of 2009, which indicates lower future returns.


What are the factors influencing stock returns?
Although various business and sector-specific factors influence stock returns, there are some that all stocks are susceptible to, such as economic, inflationary, regulatory, and rating factors. However, these assume that investors are rational and unemotional – only taking into account systematic and market risks4. In reality, investors don’t always make rational decisions, so investor behavior can also influence returns4.


Investor sentiment leading to stock price fluctuations
Given the ever-growing availability of information, we’re in a market where investor sentiment is easily affected. Investor sentiment changes the way investors make decisions, such as whether to sell or hold, and it’s proven to be an underlying driver of stock price fluctuations4.  However, not all stocks are affected in the same way – for example, high-risk stocks are far more susceptible to the effects of investor sentiment than low-risk stocks4.


The momentum of overconfident investors
The momentum effect is where winning stocks continue to perform better than losing stocks4. For example, stocks with high returns over the previous 3-12 months tend to outperform stocks with low returns over the next 3-12 months – the cause being investors that are overconfident about the momentum of losing stocks5. Momentum highlights how although past performance can estimate future returns, investor behavior can have an unpredictable influence on the stock market.

Direct real estate

Real estate remains a popular portfolio diversifier because of its ability to hedge risk – not only against asset classes such as stocks and bonds but against economic risks such as inflation6. Since 2007, the CAGR of direct real estate investments is around 5.2%; however, over time, you can see significant fluctuations year-on-year 7.

What factors influence real estate returns?
Real estate is a higher-risk asset class because of its dynamic risk factors, which can be split into two groups:

  • Market and regulatory factors: Global markets, local markets, and regulations8
  • Property-specific factors: Physical, operational, and financial8


In addition, information accuracy can impact overall returns, e.g., a lack of financial information or understanding of market fundamentals8. Furthermore, unexpected changes in law and regulation are almost impossible to prepare for and can induce huge costs.


How climate change is shaping real estate risk
Real estate investments are susceptible to changes in the physical environment – something that’s evolving faster than ever before. With changing weather patterns and extreme seasons, the effects of climate change are challenging maintenance budgets and inducing extra ownership costs9. Going forward, the transitional and regulatory costs associated with switching to sustainable energy sources will be significant, affecting many investors9. As a result, climate change not only poses a real risk to our planet, but it will be a crucial consideration when it comes to investing in real estate9.

Real estate investment trusts (REITs)

REITs essentially introduced real estate to the stock market. They’re a popular alternative to direct real estate as they’re cheaper and quicker to acquire, more liquid, and provide much of the same diversification benefits. When added to a portfolio of stocks, bonds, real estate, and cash, REITs (across many time horizons) can significantly optimize portfolio performance10. Since 2007, the CAGR on Global REITs is around 4.7%11.

What factors influence REIT returns?
Many believe that the stock market determines REIT returns because investors trade stocks and REITs in the same way6. However, the stock market only accounts for around a third of REIT investment risk6. Then direct real estate factors (as we’ve already outlined above) account for about 40% of total risk, and economic risks account for the rest6. As well as the low barrier to entry, it’s these unique risk characteristics that make REITs such a valuable portfolio addition.

Government and corporate bonds

What factors influence bond returns?
Often used to hedge risk, bonds are generally low-return portfolio diversifiers. However, due to rising inflation, the hedging benefits of nominal bonds appear to be diminishing as risk-adjusted returns enter negative territory in some countries. Nominal bonds don’t provide inflation protection, and the more sustained the period of inflation, the more returns are negatively affected12. Rising inflation also negatively affects stocks returns so is, therefore, beginning to challenge the historical 60/40 equity-bond portfolio12.


The sustained decline of nominal government bonds
Since the early 2000s, returns from nominal government bonds have been declining. In Germany, for example, rising inflation rates are outpacing bond yields, and returns from 2-year and 10-year government bonds are negative. However, despite the low returns, having a mix of government bonds and stocks can optimize portfolio returns better than a mix of corporate bonds and stocks13.

In contrast, inflation-linked bonds remain robust, as returns are consistent regardless of inflation12. This suggests that in the current inflationary environment, inflation-linked bonds can provide better risk-adjusted returns than nominal bonds12.


Increased risk may come for corporate bonds
Returns for corporate bonds have also been steadily declining. The average return in 2021 for investment-grade bonds in the US (the largest corporate bond market) was 2.7%15. For high-yield bonds, it’s a similar story, with an average return of 4.3%16.

Globally, the corporate bond stock has lower rating qualities, higher payback requirements, longer terms, and less investor protection – partly driven by the current low-interest environment, which is encouraging higher borrowing volumes17. Low interest rates allow companies to maintain their ratings (e.g., BBB) while extending their leverage ratios, increasing the risk for investors17. Going forward, these factors coupled with a steady decline in bond yields suggest that the risk-adjusted returns for corporate bonds could be under pressure.

Loan investments

Alternative income-producing assets such as loans are continuing to gain momentum. Traditionally, the loan investment market has been exclusive to banks and large institutions; however, through leveraging technology, fintechs have connected thousands of retail (and other) investors with loan investments across the globe.


Loan investments made on the Mintos platform (which has over 40% market share) have generated an average annual net return of 8.6% for investors from 2017 – 202118.

As with other asset classes during the Covid-19 pandemic, loan investments experienced fluctuations in net returns. However, compared with other debt-based investments, such as bonds (where the returns were already significantly lower), loan-based investments continued to be a valuable addition to investment portfolios. 


What factors influence loan investments?
As with the nature of most asset classes offering higher returns, investing in loans doesn’t come without risk. Loan investment risk can be broadly summarized in three categories.

  • Loan-specific
    A borrower may fail to make scheduled repayments or not pay them on time. In this case, a lending company may or may not be able to recover these payments, resulting in repayments to the investor being affected. In addition, a borrower could repay their loan early, resulting in lower returns for an investor.
  • Lending company-specific
    A lending company can go out of business or experience financial problems, resulting in it failing to meet its contractual obligations, such as not making payments or defaulting on the buyback obligation.
  • Regulatory and compliance
    Lending companies and loan marketplaces are subject to laws and regulations that vary by country. These are always subject to change, and there’s a risk that a change could negatively affect business operations.


These risk factors create low correlations between loans and other asset classes. When added to a traditional portfolio of stocks and bonds, loan-based investments (regardless of proportion) improve the portfolio’s risk and return characteristics19. These benefits increase even further for loan investments on the Mintos because of the 60-day buyback obligation offered by most lending companies19.

Risk and return of Cryptocurrency, a non-income-producing asset

Although still relatively new, cryptocurrency (crypto) has been in the spotlight of the alternative investment market due to the significant returns that Bitcoin has generated, especially for early investors. Its fast-growing popularity led to huge cryptoexchanges, and around three-quarters of major currency exchanges now offer two or more cryptos20.

Crypto as an asset class has a few distinguishing factors20:

  • Most investors are non-institutional
  • The fundamental value and market drivers are yet to be fully understood
  • It’s highly volatile


The risks associated with this asset class are still being figured out – whether that be the future relevancy (or popularity) of particular cryptocurrencies or the rules and regulations around taxation and trading. Although viewed as a financial asset, there’s no matching liability on the other side – no physical asset of value or stock in a company20. It also appears to have less of a relationship with movements in exchange rates, commodity price fluctuations, or general economic conditions20 – all of these factors forming an asset class like no other.


Bitcoin is five to six times more volatile than gold (a typical portfolio hedge) and stocks – two of the most volatile asset classes22. This volatility demonstrates that although non-income-producing assets can be profitable, future returns are unpredictable.


With portfolio investing, researchers suggest that when investors don’t achieve expected returns, it’s often due to their asset class choices (and allocations to each)23. So with this in mind, it’s valuable to understand how the risks and returns are evolving across asset classes so you can decide which of them are best suited to your financial objectives and risk appetite. Read more on the strategic asset allocation strategy.  

  1. Backtest by Curvo (Accessed 2022) MSCI World Portfolio composition: Lyxor Core MSCI World (DR) UCITS ETF
  2. Antoons, W. (2018) The CAPE Ratio and Future Returns: A Note on Market Timing
  3. Shiller, R. J. (2021) Stock Market Data Used in Irrational Exuberance Princeton University Press, 2000, 2005, 2015, updated
  4. Rashid, A., Fayyaz M., & Karim, M. (2019) Economic Research-Ekonomska Istraživanja: Investor sentiment, momentum, and stock returns: an examination for direct and indirect effects
  5. Jegadeesh, N., Titman, S. (1993) Journal of Finance 48, 65-91: Returns to buying winners and selling losers: implications for stock market efficiency
  6. EPRA Research (2014) Are REITs real estate or stocks? Dissecting REIT returns in an asset pricing model
  7. Backtest by Curvo (Accessed 2022) SPDR Dow Jones Global Real Estate UCITS ETF
  8. DeLisle, J. R. (2010) Real estate risk management: Part 2: Space-time dimensions of real estate, Chapter 4: Real estate risk management.
  9. MSCI (2020) Real Estate Research Snapshot: Part 1
  10. Nariet REIT (Accessed 2021) Global Real Estate Investment Overview
  11. Backtest by Curvo (Accessed 2022) FTSE EPRA/NAREIT Developed Portfolio composition: Amundi ETF FTSE EPRA NAREIT Global UCITS ETF DR
  12. Neville, H., Draaisma, T., Funnell, B., Harvey, C. R. & Van Hemert, O. (2021) The Best Strategies for Inflationary Times
  13. Luskin, J. (2017) Journal of financial planning: Examining total portfolio performance: U.S. Government v.s corporate bonds
  14. Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States and Germany, retrieved from FRED, Federal Reserve Bank of St. Louis; Accessed on February 2022
  15. Moody’s, Moody’s Seasoned Aaa Corporate Bond Yield [AAA], retrieved from FRED, Federal Reserve Bank of St. Louis; Accessed on February 2022
  16. Ice Data Indices, LLC, ICE BofA US High Yield Index Effective Yield [BAMLH0A0HYM2EY], retrieved from FRED, Federal Reserve Bank of St. Louis; Accessed February 2022
  17. Çelik, S., G. Demirtaş and M. Isaksson (2020) OECD Capital Market Series, Paris: Corporate Bond Market Trends, Emerging Risks and Monetary Policy
  18. Net investment return is defined as the total annualized gross return, minus the annualized loss rate. Write-offs have been applied to the loans issued by suspended lending companies based on our recovery estimates.
  19. Aue, T. G. (2020) Do P2P Loans provide Diversification Benefits in Multi-Asset Portfolios?
  20. Giudici, G., Milne, A. & Vinogradov, D.(2020) Journal of Industrial and Business Economics 47:1–18: Cryptocurrencies: market analysis and perspectives
  21. Yahoo Finance (Accessed 2022) BTC-EUR Interactive Stock Chart | Bitcoin EUR Stock – Yahoo Finance
  22. MSCI (2021) Bitcoin: good as gold?
  23. Brinson, G.P., Hood, L.R. & Beebower, G.L. (1986) Financial Analysts Journal, Vol. 42, Determinants of Portfolio Performance

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