People have unrealistic expectations

Doug Abbott

Against a backdrop of market turbulence, people’s expectations for income and returns, according to Schroders 2019 Global Investor Survey, are continuing to rise. Despite recognising that investment plans should be long term, the majority of investors alter their investments according to short-term market movements.

Expectation is the root of all disappointment

Speaking at an event hosted in Johannesburg to unpack the 2019 study findings, Doug Abbott, Schroders South Africa Country Head, noted that these high expectations are despite the fact that most local respondents failed to achieve their investment objectives over the past five years.

“The research shows that over the next five years, South African investors expect to make an average annual total return (income and capital growth) of 13.8%, which is more than 3% higher than global investors’ expectations (10.7%). These relatively high expectations are despite the fact that six-in-ten (59%) South Africans feel they didn't achieve their investment objectives over the past five years, which is higher than global investors (51%).”

The findings in a nutshell

According to the survey, people lack confidence in exactly how much money they have invested/saved, and where it is. Only 44% of people are very confident with how much money they have with various financial providers, and this reduces sharply for those with less self-purported investment knowledge. People are not satisfied with the performance of their investment(s). Over half (51%) have not achieved what they wanted with their investments over the past five years, and most attribute their own action or inaction as the main cause of this failure.

On occasion, it appears that people are too active, possibly at risk of making knee-jerk reactions that aren’t fully informed. The average holding period before changing or cashing in an investment is 2.6 years, which is just over half the five-year term experts generally recommend staying invested for.

People have unrealistically high annual return (i.e. income and capital growth) expectations. Investors expect on average a very high 10.7% return per year over the next five years, while one in six expect at least a staggering 20% annual return on their total investment portfolio.

Thirty one percent of people prefer the majority of their portfolio in funds that invest in their home country, whilst a further 34% prefer investing in countries familiar to them. Only 31% of people globally feel emerging markets could be beneficial to their portfolio, and almost a quarter (24%) think it is too risky to do so.

More confidence, visibility and control

Globally, the results indicate a need for increased confidence in people’s control over their investments. Nearly a fifth (18%) of people only have a rough idea of how much money they have with various financial providers. This rises to 41% of those who identify themselves as having only a beginner or rudimentary level of investment knowledge.

The least confident region is Asia, with a quarter (25%) of respondents in this continent feeling very confident in the amount of money they have across providers. Drilling down to specific countries, Japan is the most likely to show a lack of confidence in the knowledge of how much money they have (47%). India sits at the other end of the scale, with an overwhelming 95% of people with a good idea of how much money they have.

People seek more visibility and control over their finances, with 87% of respondents across the world keen to be able to view, check and make changes to all their investments on one consolidated platform, such as a website or an app. Interestingly, people are most likely to want this provided by an independent, third-party organisation (34%).

Looking at how regularly people interact with their money; despite a general lack of confidence in exactly how much they have, people are engaging frequently. Over three quarters (77%) of people check their investments at least monthly, rising to 80% in Asia.

Millennial investors

Millennials appear to be less patient than older generations, moving investments elsewhere or cashing in less than every two years (1.9 years). This is noticeably more frequent than Generation X (2.7 years), Baby boomers (3.7 years) and the silent generation (4 years). Millennials are also more likely to make reactive decisions in the face of volatility, with 15% of people of this age group agreeing they are likely to do this in times of instability. This again is negatively correlated to their age group, with only 4% of the silent generation feeling they will behave this way.

Millennials were much more likely to have money invested in cryptocurrencies and crowdfunding (23% and 12% respectively). This interest in these newer, and riskier, investments is reduced with the older age groups. Unsurprisingly, some of their attitudes towards risk reflect this, with millennials being the most likely to believe the greatest risk to them is not taking enough risk to achieve their investment objectives (53%). This trend also reduces with age, to 24% of those aged 71 and over.

People’s financial behavior

Abbott suggests that the expectations being exhibited by local investors are due to the good long-term returns that South Africans have been able to achieve from equity markets, historically, and the need to achieve returns that can beat higher inflation rates than developed markets. 

Unfortunately, Abbott says that globally and in South Africa, investors may need to manage their expectations, as future returns may not match their expectations. He points to Schroders’ latest predictions of 10-year returns to 2028, compared to returns over the 10 years to 2018, which show that future returns from market indices on a global level may be limited.

“After almost a decade of strong stock market returns, which has seen many investors become used to good returns from global equities in particular, our return expectations for the next ten years show that stock market indices’ returns are likely to be lower than those experienced in the past decade. In the US, the equity market is predicted to weaken from 13.9% a year on average to 7% a year, while in the UK and European markets, equity returns are expected to lessen from 8.8% and 9.5% to 4.6% and 5.1%, respectively.”

The implication of this widening gap between expectations and reality is simple, says Abbott. “Expectations need to be reassessed, but there are still attractive opportunities for investors who take the right approach. We believe that factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors over the next decade,” he concludes.

Editor’s Thoughts: 
As mentioned above, the majority of investors alter their investments according to short-term market movements. However, investors may need to manage their expectations, as future returns may not match their expectations. Do you believe that future returns may be limited? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za