What type of investor are you and are your expectations realistic?
According to the annual Schroders Global Investor Study, UK investors are expecting an average annual return of 8.7% on their investments over the next five years.
The study, which surveyed over 22,000 investors globally, including more than 1,000 in the UK, found that 58% of UK investors are expecting to make an average return of up to 10% over the next five years. Just under a third (31%) are expecting a minimum of 10% a year.
Millennials are even more optimistic. Nearly half (43%) expect a minimum return of 10% a year including almost a quarter (23%) who expect more than 15%.
Are investors expecting too much?
For equities, historic performance has been lower than the expectations expressed in the study.
For example, world stock markets have provided average annual returns, with dividend income reinvested, of 7.2% over the past three decades, as measured by the MSCI World index.
The Schroders Economics Group has forecast a 5.4% annual return for UK equities over the next seven years, or 2.4% a year after inflation is taken into account.
Schroders investIQ
Schroders investIQ is an online test, developed by behavioural scientists, that helps investors understand their investment personality.
The test takes less than eight minutes to complete and at the end investors receive a detailed report outlining which behavioural traits influence them the most and how best to deal with them.
Investors averse to risk
Despite the high expectations, the Schroders study also found that UK investors are currently averse to taking too much risk, due to the uncertainty caused by international events.
When asked about the current uncertainty surrounding international politics/world events, 48% of UK investors said they were keeping more of their money in cash than they previously had as a result. Additionally, 59% said they do not want to take on as much risk in their investments now.
Commenting on the findings, Darius McDermott, managing director of Chelsea Financial Services, said: “Investor psychology is such that people latch on to their most recent experience. In this case it is an eight-year bull market in equities and a 30+ year bull market in bonds. But unfortunately markets don’t just rise.
“As the interest rate cycle reverses and rates rise, yields on bonds will rise from rock bottom levels and their price will fall. It will be hard to make money from bonds for a while.
“The latter stages of an equity bull market also tend to have lower returns, so expectations of 8-10% annualised gains are unrealistic I’m afraid, especially as the people surveyed do not want to take much risk and are saving in cash. With inflation at around 3% and cash accounts paying so little, the real value of your cash savings is actually falling!”
A thirst for knowledge
The majority of UK investors (83%) feel the need to improve their understanding of investments. This is compared to 84% in Europe and 88% globally.
Just under a third (30%) would specifically like to improve their knowledge and understanding of tax-efficient investments.
Darius concluded: “The good news is that people are keen to learn more and improve their understanding of investments, so it is up to us, as an industry, to make sure this happens. Investors need to have more realistic expectations and a clear understanding of risk and reward. They need to know how they may achieve their financial goals and to avoid disappointment.”
Source: Schroder Global Investor Survey 2017