Unrealistic investors expect returns of 11% a year

A global poll of 23,000 investors reveals they have unrealistically high annual return expectations compared to market returns for the past 120 years.

Investors expect to pocket annual returns of 11% or more a year over the next five years, even in the face of the Covid-19 crisis, according to research. 

The Schroders Global Investor Study, which surveyed 23,000 investors worldwide, reveals that average annual return expectations globally are 10.9%, up 1% from two years ago. Within that, investors in the US are the most optimistic about returns, expecting performance of 13.2% a year. In Europe, investors think they will get 9.4% returns on average over the next five years. 

What is a realistic return?

These figures are far in excess of what could be considered a realistic annual return. According to the Credit Suisse Global Investment Returns Yearbook 2020, global stocks have delivered a real return (after inflation) of 7.6% over the last decade, compared to 3.6% for bonds. Looking much longer term, over 120 years, the average annualised real return was a more modest 5.2%, and 2% for bonds.

Schroders said the vast majority of people are still basing their predictions on the returns they received during the decade-long bull run, which has just come to an end.

That said, investors’ income expectations, while still high, are now lower than in previous years, with UK investors predicting they will get an 8.6% income over the next 12 months compared to 10.3% a year ago. 

Reducing risk in portfolios

The survey also asked investors if they had made changes to their portfolios as a result of the pandemic. Around 27% of investors said they had moved significant parts of their portfolio to lower-risk investments, with as many as 78% making changes to their portfolios during the sharp market correction seen in February and March. 

Investors who consider themselves “expert” or “advanced” in terms of their investment knowledge were more likely to have made changes – accounting for 89%. Interestingly, 19% of respondents took the opportunity to move some of their portfolio into higher-risk investments, while 20% stayed put and didn’t make any changes.

Those who remained calm and opted against making any investment decisions during the sell-off were more likely to be older – 100% of people polled aged 71 or over either made no changes or moved their portfolio but kept the risk level the same, compared to 16% of millennials. 

How long will Covid’s legacy last?

Looking ahead, investors are optimistic the impact of Covid-19 will not be too wide-ranging. Two-thirds of people said Covid-19 will have a negative economic impact for six months to two years.

“The UK economy is still in the midst of the financial havoc wreaked by the pandemic that has marked the end of the longest bull run in history,” said Doug Abbott, head of UK intermediary at Schroders. 

“However, from our research, we can see that UK investors are looking beyond the immediate downturn to anticipate the shape of the post-Covid economy.

“In our view, the virus is likely to reinforce the trends that were driving activity before the outbreak struck, by challenging the growth path, creating greater pressure on government finances and increasing inequality as technology becomes ever more pervasive.”

Savings patterns diverge

Redundancy, lost income and the precarious job market as a result of the pandemic has emphasised the importance of a decent savings buffer. With lower commuting costs and less spending on leisure activities, some households have been able to save more in recent months as their costs have come down, but others have struggled to put money away and are dipping into existing savings. 

Separate research from BMO and F&C Investment Trust (LSE:FCIT), which surveying more than 6,500 UK adults, found that 14% people had been able to save or invest more since March, while one in four millennials have either started investing or have invested more since then. 

In March, 41% of people planned to save more in 2020 than they had the previous year, but by May this dropped to 27%. Over the time, there was also an 18% increase in the number of people saying they would not invest at all this year, rising to 39%. 

Meanwhile, 30% of people have dipped into their savings since the start of the year, with men and millennials the most likely to do so. 

“While we live through this unprecedented time, it is important to balance our current financial needs with our saving and investing objectives for the future,” said Ross Duncton, managing director at BMO. 

“During this period, many of us may have seen a change in our appetite towards risk and specifically investment risk. However, we cannot forget that investing is a long-term strategy and market volatility should not be met with rushed decisions to our financial commitments. Investing little and often will help to smooth out your exposure to the current volatility across markets and making regular contributions to your investment portfolio can also help you to keep track of planning your everyday finances.”

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