A recent survey of individual investors conducted by Natixis Investment Managers shows that investors seem to set expectations at the level they need or want, regardless of what they think the market can achieve.
American investors almost certainly are headed for disappointment this year, even if the stock market continues its recent rebound and avoids too much trouble.
While it certainly is possible that they will be let down by the market and their investments, the bigger betrayal is likely to come from their own expectations, which appear unreasonable and inflexible regardless of market conditions.
Quite simply, individual investors want it all: reward without risk, safety without diminished performance, and bigger returns despite a market prepared to offer less.
It’s a bit like David, an investor from Seattle, who wrote me a few weeks back saying, “I know there is not really any way for an ordinary guy to get rich quick, but tell me how does somebody do it?”
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The problem with having the wrong expectations is that it creates a platform for failure under even the best of circumstances.
Expect double-digit gains every year, for example, and it’s easy to feel let down when growth is modest, even if you understand that downturns aren’t going away. Expecting more modest high single-digit annualized gains over the long haul doesn’t really diminish the amount you expect the portfolio to grow to, it simply allows the occasional misstep without feeling lost and let down.
A survey of individual investors conducted by Natixis Investment Managers shows that investors seem to set expectations at the level they need or want, regardless of what they think the market can achieve.
Among the study’s key findings:
• Some 85 percent of Americans said they would choose safety over investment performance, and roughly two-thirds say it is tougher now to get ahead financially, with nearly half of the people feeling they’re exposed to greater market risk now than they were facing before the 2008 financial crisis.
• While almost two-thirds of respondents say they’re comfortable taking risks to get ahead, nearly 40 percent of the surveyed investors aren’t actually willing to take on more risk now. Just over half blame market volatility for undercutting their ability to reach their retirement and savings targets.
• Despite recognizing the problems of the market, Americans say they need an annual rate of return of 9.8 percent above inflation. That’s a gain of about 12 percent before you factor in inflation, and that’s higher than the historical norms of pretty much every asset class out there.
Oh, yes, and the market is supposed to do this after a 10-yearlong bull run and at a time when interest rates are rising and global economic growth – while still very solid – is slowing.
Have fun with that.
The 9.8 percent expectation is up from 8.9 percent when investors were surveyed just over a year ago, meaning that despite the market having stumbled sharply at the end of 2018, investors expect more from it now.
Their 9.8 percent solution is 43 percent higher than the return level that financial advisers say is realistic, according to David Goodsell, executive director at the Natixis Investment Managers Center for Investor Insights. While financial advisers have a vested reason to try to manage expectations and limit optimism, the truth is that it’s not hard to find experts who believe the market is due to be flat or down in 2019, making the discrepancy even larger.
“What people need and expect from the market doesn’t jibe with their view on volatility,” Goodsell said recently. “Seven out of 10 people we talked to said we are due for a market downturn in the next 12 months … so the average person we talked to knows we are due for a market downturn but expects their returns to be 9.8 percent above inflation.
That’s one word for it. I’ll skip the other appropriate descriptions to say simply that investors are destined for failure and disappointment that way, unless the market manages to resume a path of straight-up gains.
Even then, the desire to get safety over performance likely will mean that most people get results that fall short of what the market delivers.
It gets worse for younger and less experienced investors, as the survey showed that the return expectation of those who entered the market after the 2008 crisis was 11.3 percent above inflation.
Sure, the market could surprise the pundits and break through to reach new highs. The fact that few experts are calling for it is not a big deal; those experts have been wrong before.
But expecting it and planning on it is a surefire way to feel burned by the market even if returns are within the range of acceptable for reaching long-term goals.
So, before the year goes too far and the market takes results way off the rails of these expectations, review your holdings and come up with a realistic plan, one that hopes to grow your portfolio by using the market’s volatility and downturns as a way of buying long-term holdings on sale.
Get over the attitude that volatility is standing in your way by dollar-cost averaging into investments, and reduce your expectations by adding to your set-asides. The more money you contribute regularly, the less you need the market to return; that will give you a more realistic viewpoint.
And your increased savings ultimately results in a bigger portfolio, no matter what the market does.
“People think they have a realistic view on the risks that come with investing, but in reality, they struggle with just how much risk they’re willing to take in pursuit of bigger returns,” Goodsell said. “If you set your expectations improperly, the market is going to disappoint you.
“That’s not to say the market makes everyone happy who has lower or more realistic expectations – it’s going to disappoint pretty much everyone sometimes – but it’s a lot easier to reach your goals if you start out with realistic expectations and work towards them, rather than making the market do all the work because it’s what you need.”