Why investors will miss their mark for the next 5 years

During a Schroders media briefing, head of fixed income and multi-assets Simon Doyle told investors not to be too optimistic about the global recovery from the COVID-19 downturn.

The Schroders Global Investor Survey revealed that Australian investors expect an annual return of 8.9 per cent from their investments over the next five years – lower than global expectations of 10.9 per cent, but well above the S&P/ASX 200 index, which delivered 7.8 per cent over the last 10 years.

“The net result of that to me is that expectations of 8.9 per cent are optimistic. I think they are very optimistic, pie in the sky,” Mr Doyle said.

Mr Doyle pointed out that expectations have fallen from 10.9 per cent in the previous year to 8.9 per cent, but believes investors will still be disappointed despite reducing their targets.

Why investors will miss their mark for the next 5 years

He explained that to gain an 8 per cent return in this environment, investors would need to take on volatility of around 11 per cent to 12 per cent.

Instead, the fund manager explained how investors who have typically done well through passive investments need to adopt a well-diversified broad investment portfolio.

“Investors would need to adopt a broader investment universe, such as private market investments where there are some liquidity premiums, and not be so dependent on equities and utilises the credit curve,” he said.

The research showed that 80 per cent of people are still basing their predictions on returns they’ve received in the past, with a decade of strong returns inflating expectations to “unrealistic levels”.

More advanced investors who rank their investment knowledge as advanced or expert believe past performance is an indicator of their future performance.

Beginner investors who have not experienced the same past wins are less likely to think past investment informed future performance.

“The next decade is set to deliver returns that likely don’t match the expectations of investors,” Mr Durack said.

Investors also have a rosy view of the COVID-19 recession, with 66 per cent believing the impact will be felt for six months to two years, while only 21 per cent believe the impact will go beyond two years.

“Given this acknowledgement of the ramifications of COVID-19 for the economy, it is surprising that more respondents don’t foresee this affecting the level of return on their investments over the next year,” Schroders said.

The research also revealed that a “significant majority” of people made changes to their portfolio during market volatility in February and March.

It also showed that Australian are more likely to stick with their original investment plans, with any of their global counterparts, with 34 per cent of investors not making any changes to their investment portfolio.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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