Investor expectations have been dialled up by the market returns of recent years. Independent Financial Advisers will need to add perspective and gently talk those expectations down.
The latest Schroder Global Investor Study revealed some fascinating, and somewhat disconcerting, results.
- Investors expected an average annualised return of 10.7% from their portfolios over the next five years.
- The younger the client, the higher the expectation.
- With an ageing population, low inflation and poor productivity, returns are likely to be lower from here.
Had any adviser achieved an annualised return of 10.7% from their portfolios over the past five years, they’d be feeling like they’d done their investors proud. Speaking for ourselves here at Pembroke Financial Services, our own in-house model portfolios have more than matched our client’s expectations, with our Cautious portfolio returning an annualised +5.85% and Adventurous +9.25% ( Source FE Analytics, date range 01/07/2014 to 01/07/2019, figures net of fund charges).
Andy Knight, Chartered Financial Planner and Investment specialist says “Our opinion is that if markets achieved a return of 10.7% per year from here on , after a decade of rising equity and bond markets in a slow growth environment, it would be nothing short of miraculous!”
Yet this is where investor expectations have landed according to the study. It showed that not only do investors expected an average annualised return of 10.7% from their portfolios over the next five years but one in six expect a 20% annualised return over the same timeframe! Interestingly, Babyboomers (those born between 1945 and 1965) have more realistic return expectations of 7.5%. For millennials (born in the 1980s, 1990s, or early 2000s) it sits at 11.7%.
Andy comments that ‘Unrealistic’ and ‘staggering’ was Schroders view and we, at Pembroke, have to agree.
The trouble is, buoyant markets and the era of Quantitative Easing (QE, or “printing money to see the world out of the Credit Crunch”, as some people would put it) have set these higher expectations. Between 2008 and 2018, the index’s average annualised return has been 11.3%. Volatility has been notably absent and it really hasn’t felt like investors have had to take a lot of risk to achieve these returns.
The perspective point is this – these returns have only been achieved from a spectacularly low starting point – the FTSE 100 was at 3,753 on 13th March 2009 and the S&P 500 at 683 on the 6th. The idea that similar returns can be achieved with a starting point of 2,803 (1st March this year) for the S&P 500 and 7,228 (15th March) for the FTSE 100 would seem ‘eccentric’ to say the least.
Nevertheless, it poses a problem for Independent Financial Advisers such as ourselves, who operate in the investment world using financial products such as Individual Savings Accounts (ISAs), Unit Trusts, Bonds and Pension products such as SIPPs (Self Invested Personal Pensions) as their tools to help clients to achieve their financial goals.
Firstly, it skews investors’ definition of risk. This has been seen in some of the recent scandals, such as the London Capital & Finance collapse. Investors promised 8-10% return considered this a realistic return, rather than recognising the risk needed to generate it. Secondly, it means that investors may not recognise the importance of saving – If you believe you can make a 10% return then why save more into their retirement pots? This is a particular problem for younger investors.
IFAs will have an important job in managing these expectations over the next few years given that factors such as an ageing population, low inflation and poor productivity influence returns. The Schroder’s study adds: “All indicate the next ten years will not match the returns of the previous ten years.”
At Pembroke Financial Services we have created a globally diversified range of what we call ‘model portfolios’ designed for clients with all investment risk profiles – Cautious through to Adventurous – as well as a range of risk graded Ethical portfolios. These portfolios are actively and professionally managed in collaboration with an award-winning Discretionary Fund Manager. With a quarter of a billion pounds of our clients’ money managed under this Wealth Management proposition utilising ISA, Pension, Bond and Collectives tax wrappers, we believe that we can help clients at any stage of wealth accumulation.
Please call us on 01273 774855 or email us by clicking here if you would like to discuss how we can help you make the most of your investments.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.