American investors believe their portfolios are set to generate returns more than twice what financial advisors believe is realistic, a new survey shows.
Key Takeaways
- Investors expect annual returns of 15.6%, more than twice the 7% that financial professionals advise.
- The gap between the expectations of advisors and investors for Americans is more than twice the global average.
- Investors ignored the declines of 2022, with 59% saying they are comfortable taking on more risk and 44% saying they were taking too much risk.
The 2023 Natixis Investment Managers Survey of Individual Investors showed that American investors aren’t setting realistic expectations, believing their investments can return 15.6% over the long term, well above the 7% returns that financial advisors expect.
Americans' expectations for their investment returns don’t just exceed the advice of financial professionals, they are also above the global average. The international survey found that globally, investors set their expectations 42% above what financial advisors anticipate, while Americans’ expectations lie 123% beyond what their advisors say is realistic.
Meanwhile, they also haven’t adjusted their risk levels to meet changing conditions that higher interest rates are likely to trigger.
Returns Shrinking, But Risk Remains High
Between 2012 and 2021, the S&P 500 delivered an average annual return of 16.5%, before the 2022 market ended in a loss. In fact, 86% of respondents said 2022 was a “wake-up call.” But investors haven’t adjusted their risk tolerance, as 59% said they were comfortable taking on more risk, with 44% admitting that they are taking on more risk than they should.
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“The economic landscape has gone from low inflation, low rates, and low dispersion to higher inflation, rising rates, and higher dispersions,” said Dave Goodsell, head of the Natixis Center for Investor Insights in the study. “The market promises slower growth and greater risk, but investors have not meaningfully adjusted their return assumptions or reassessed where real risks lie.”
Investors Misunderstand Rates, Risks
One stark concern raised by the survey was what appeared to be investor ignorance of the current economic climate. Of the respondents, 56% said they understood the impact rising rates will have on bonds, but when asked, only 3% could correctly answer that present bond values typically go down while future income potential goes up. The most common answer, by 37%, was “I don’t know.”
Investors have a different view of risk than financial advisors, failing to take goals in mind, the study showed. While only 9% defined risk as failing to meet their financial goals, three times that number of financial advisers gave that response. Exposure to market volatility was how 29% of investors said risk should be defined, followed by 23% defining risk as a loss of assets and 18% said risk means underperforming market benchmarks.
