Domestic Bonds

Are your market expectations unrealistic?

Investors haven’t lost money in this stock market, they’ve lost their minds.

They disconnected from reality and entered an alternate universe, a land of milk, honey, and above average stock returns. Well above average.

According to Natixis Investment Managers’ latest global individual investor survey, US retail investors now expect long-term average stock returns of 17.5%. This is after inflation – which has increased lately – so the gross return is expected to exceed 20% per annum.

Historically, national large cap stocks return closer to 10% per annum on average, with small company stocks offering a slight premium and earning around 12%.

Expecting a good year is one thing; believing that the market can defy gravity is another.

In comparison, the Natixis survey showed that US financial advisers believe 6.7% is a realistic long-term return. While advisors have a vested interest in keeping hopes under control – exceeding expectations makes clients happy, when not being successful is a problem – planning for below average numbers is not going to get clients excited.

The difference in expectations between professional and individual domestic investors has never been greater; this year the gap is 161%, compared to a year ago it was 73%. And last year, individual investors thought the market could return around 15%, so one of the biggest differences is that advisers tightened while individuals improved.

“People did pretty well last year, in fact they tell us they made 16.5% above inflation,” said David Goodsell, executive director of the Natixis Investment Managers’ Center for Investor Insight. “When you see this during a very difficult time and envision brighter things as we come out of lockdown, people are optimistic, they think ‘Maybe I can do even better this time.'”

Of course, what investors remember most recently is that in 2020 the stock market experienced both the fastest slowdown and recovery on record; neither situation is normal, but individuals normalize the rise, expecting the one-time event that coincided with the pandemic to become the blueprint for the future.

They can justify a 17.5% return as normal right now because the market – as measured by the Standard & Poor’s 500 – is up around 15% in the first half of the year and gained almost 45% in the last 12 months. The three- and five-year average annualized returns of the Index are approximately 18.25%.

But in the past 10 calendar years, the index has only exceeded 17.5% four times. There were also two years with less than 2% gains and one year with a loss. The average annualized market gain has been less than 15% over that time period, and if you extend your measure to 15 years – so that it covers the carnage of the 2008 financial crisis – the average return is slightly above the historical standard. by 10%.

But it’s important to recognize that the guy whose research actually quantified that standard – Roger Ibbotson of Zebra Capital Management – strongly believes that stock market returns will be muted for a period of time that could potentially span the rest of your life.

Ibbotson is half of the duo behind Ibbotson-Sinquefeld’s landmark study of “stocks, bonds, bonds and inflation” first published in 1982. He showed that it didn’t matter to how much the market rebounds, the typical return for large cap stocks over the past 95 years has been 10%.

From the turn of the century, however, Ibbotson began to sound a different tune, saying that the past would not be the prologue to the future; he expected the next 25 years to produce less than the previous 75, with average returns of 8% for large caps.

Over the next two decades, that’s roughly the average return that investors get.

Ibbotson expects that 8% figure to hold for at least the next quarter century.

If so, what amounts to a fairly good return will be a disappointment to investors who expect to earn more than double.

And there is the catch in all of this, because investors who expect big returns have to do something that most people hate to do in order to achieve them, which is take big risks.

Most people say they are willing to take risks, as long as they don’t lose money.

This is not how it works.

“Everyone wants to have an ice cream sundae, no one wants to gain weight from it,” says Goodsell.

The Natixis survey showed that investors having the choice between performance and security will favor security and the protection of assets over potential profits with a margin of almost 4 to 1.

Expecting inflated returns while strategizing to be safe puts nuts on the proverbial Goodsell sundae.

Investors cannot live on wishful thinking.

If you want to make your retirement brighter, plug higher expected returns into any free online retirement calculator. The more returns you project in the market, the more gold you will have for your golden years.

But you can’t eat the expectations, and you shouldn’t expect the market to save for you, fill your shortfall so you can spend more and save less now.

The speed of the decline and recovery in 2020 has been mind-boggling, but the suddenness of these moves – and the potential for heightened volatility in a market that fears the impacts of rising inflation, interest rates and more. again – should make investors be more cautious about the future.

Investor expectations show just the opposite.

What you plan to achieve and what you hope to achieve are two different things; save and invest according to historical market standards, leaving room for hope that you will do better.

Otherwise, you will not only be disappointed with the long term performance of the stock market, you will be disappointed with your own financial results.