A recent survey of individual U.S. investors indicates that they may be overly optimistic about returns in the coming year. This according to a Wall Street Journal article by columnist Jason Zweig.
The survey, conducted by Natixis Investment Managers, included 8,500 individuals in 24 countries of which 750 were U.S. individual investors. It found that the U.S. participants expect to earn 17.3% this year, after inflation. Given that the S&P 500 returned 18.4% last year and is up 15.9% so far this year, Zwieg notes, this may not sound outlandish. “Recent past returns,” he notes, “always mold future expectations.”
Over the long term, however, the survey reflects even higher return expectations than for this year (17.5% versus the 17.3% noted above), which exceeded expectations recorded for 2019 and were twice the average annual return on U.S. stocks since 1926 (7.1%).
Although the U.S. investors in the survey were the most optimistic, Zweig notes, others were not far behind. He adds that other recent sentiment metrics also showed rosy expectations, including Yale University’s One-Year Confidence Index, which this year hit its highest level since 2012.
As to whether the 17.5% return expectation highlighted by the survey is realistic, Zweig cites comments from Natixis head of global market strategy Esty Dwek: “Obviously they feel realistic enough to the respondents in the survey. It’s a question of coming back to earth.”
Zweig agrees, adding, “The higher your expectations, the lower your odds of achieving them,” offering the following data from Wharton:
“In short,” Zweig writes, “investors were more likely to lose money than to compound it by at least 17.5% a year.” To earn such sizeable returns, he argues, an investor needs “enormous skill, phenomenal luck and the nerves and reserves to withstand bloodcurdling losses. In other words,” he says, “you have to take enormous risks.”
The Natixis survey also showed that 77% of the U.S. investors would rather keep their money safe than earn a high return, which Zweig notes “implies their expectation of getting 17.5% out of their stock portfolios is more a wish or a dream than a rational forecast.”
Zweig concludes with a quote from Benjamin Graham: “Operations for profit should be based not on optimism but on arithmetic.” He weighs in with his own prediction: “I’d be thrilled if stocks returned at least 4% annually over the next decade or two after inflation. I’d also be surprised.”