Investors should have more realistic expectations

A WORRYING gulf is developing between the high expectations of investors and the more restrained outlook seen by fund managers.

And of even more concern is that millennials, perhaps because of their limited exposure to the vagaries of the markets are, in particular, out on a limb.

Investors expect total annual returns, including growth in their money, as well as any income paid out in the form of dividends and interest from a variety of investments including cash, bonds, property funds and equities, of 10.7 per cent over the next five years, according to the Schroders Global Investor Study 2019.

Returns expectations were highest in the Americas at 12.4 per cent and lowest in Europe at 9.0 per cent. The UK came in at 9.3 per cent.

Schroders described investors’ expectations as “optimistic”, pointing out that in the last five years global stocks, as measured by the MSCI World Index, have returned 6.7 per cent annually. The Barclays EquityGilt Study shows stock market returns over more than 100 years have been around five per cent annually.

The expectations are higher even than in the 2018 study, when the forecast was for 9.9 per cent a year.

Millennials believe they can get an annual return of 11.5 per cent.

They appear to be less patient than older generations, moving investments elsewhere or cashing in less than every two years (1.9 years), and are also more likely to make reactive decisions in the face of volatility.

Claire Walsh, personal finance director at Schroders, said: “The study reveals that younger people expect higher returns from their investments.

“That might be partly down to their investment time horizon. In theory, they have more time on their side and therefore could be willing to take more risk knowing that they still have time to recoup any losses.

“However, I suspect that this is possibly because younger people don’t have as much investment experience. For some they will have only known strong stock market returns.”

Globally, the average investor expects income of 10.3 per cent over the next 12 months, only marginally lower than their average total return expectation.

Rupert Rucker, head of income solutions at Schroders, said: “The findings are startling. Investors not only have exceptionally high hopes for the total returns they will receive but they also believe they can get a level of income that almost matches that figure.”

In contrast, recession fears among fund managers hit an eight-year high in August amid continued concerns over trade wars and restrictive fiscal policy, according to the Bank of America Merrill Lynch Global Fund Manager Survey.

The proportion of respondents, 34 per cent, who believe that a technical recession (two consecutive quarters of negative real GDP growth) is likely in the next 12 months reached its highest level since 2011. Albeit 64 per cent of asset allocators think it unlikely.

Nevertheless, the results are in line with the bank’s assessment – it believes there is a one-in-three chance of recession.

While fear of a trade war, given US President Donald Trump’s aggressive attitude to China and others, is the biggest concern, you can add currency issues, slowdowns or recessions in the US, China, Germany and possibly the UK, plus the ongoing Brexit angst.

Investors and fund managers seem to be at opposite ends of the scale.

I would say investors need to be realistic in their expectations, invest for the medium to long-term and in the short-term expect some volatility.

Don’t try and time the market as if you wait for a fall or an opportunity you may end up delaying too much and missing out.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice