Returns on stock market investing are never guaranteed, and without a crystal ball, who knows how your investment choices will fare. It seems UK investors have great expectations of what their investments will generate. Most are expecting an average annual return of 8.7% on their investments over the next five years, according to the annual Schroders Global Investor Study.
The study, which surveyed over 22,000 investors globally, including over 1,000 in the UK, found that 58% of UK investors are expecting to make an average return of up to 10% over the next five years. Almost a third (31%) are expecting a minimum of 10% a year. It’s the millennials who are the most optimistic (or unrealistic). Nearly half (43%) expect a minimum return of 10% a year, including almost a quarter (23%) who expect more than 15%. Our expectations were in line with Europe overall at 8.7%, but less than the global average expectation of 10.2%.
The burning question is are investors expecting too much?
Looking at past performance and forecasts — sadly, yes. For example, global stock markets have provided average annual returns of 7.2% over the last three decades (with dividend income reinvested), as measured by the MSCI World index. Meanwhile, the Schroders Economics Group has forecast a 5.4% annual return for UK equities over the next seven years, or 2.4% a year after inflation is taken into account. Looking at these numbers, many from the survey will be somewhat disappointed.
The study also found that UK investors are avoiding taking too much risk with their money, due to the uncertainty caused by international events. Just under half at 48% of UK investors said that due to the current uncertainty surrounding international politics/world events, they were keeping more of their money in cash than they previously had as a result.
There is actually a huge risk to the real value of that money sitting in cash, thanks to the effects of inflation. With interest rates so low, and even with the Bank of England’s decision to raise interest rates by 0.25% to 0.5% at the beginning of this month, returns on savings accounts still won’t keep up with inflation – which is on the up too.
Historically stock market returns have far outweighed cash over the medium and long term.
If anyone is unsure about the benefits of investing in the stock market over cash savings accounts, calculations by Fidelity show if you had invested £15,000 into the FTSE All Share index 20 years ago you would now be left with £47,443. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with £19, 548. That’s a difference of £27,895.
So having some of your money in equities — that is, investing in companies that work hard to grow their earnings and provide investors with decent returns — will help outperform inflation. Even if the returns are below expectation.
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