Opinion: You are probably way too optimistic about your investment returns
From: marketwatch.com
Some big percentage of voters will be disappointed with what the new president can achieve next year.
But a larger percentage of investors may be even more dissatisfied with their financial advisers.
A recent study from Natixis Global Asset Management shows that investor expectations about the total return they can squeeze from a portfolio remain sky high compared with what advisers believe is achievable. That means the coming year could be a tough one unless investors choke down a hard dose of reality.
According to the Natixis study, investors currently expect returns of 8.5% on top of inflation. Financial advisers, by comparison, say that 5.9% above inflation is realistic.
Given that inflation was running at 1.1% in August, that means advisers are calling for gains of roughly 7%, pretty much in the middle of the 6%-to-8% annualized range of most long-term targets. Individual investors, with their expectations of closer to a 10% total return, are thinking like Pollyanna. Even in a long bull-market rally it’s dangerous to being hypercheerful.
Sure, the S&P 500 SPX, +0.47% is up 6.5% this year — when dividends are reinvested — and has an annualized average total return of 14% for the last half-decade, but it is up less than 7% annually for the last decade. The Dow Jones Industrial Average DJIA, +0.43% has the same kind of long-term results, and an investor who diversified into small-cap stocks with something like the Russell 2000 RUT, +0.69% got improved results this year (gains of nearly 8%), the long-term gains are roughly the same as the indexes of bigger stocks.
And those gains are before the effects of inflation.
“Investors are optimistic about returns; they have high hopes for what they can achieve,” said David Goodsell, executive director of the Durable Portfolio Construction Research Center at Natixis Global Asset Management. “We see this trend globally. The U.S. is a bit better than other places but the return expectations [worldwide] are about 144% [too high].
Italian investors expect returns of 9.9% above inflation, he said, while advisers say that a 3.4% gain is realistic.
The expectations of investors are doubly flawed when you dig deeper into the survey results, because three-quarters of investors described themselves as “cautious” and said they would take safety over investment performance.
