Advisers Should Check Individual Investors’ Unfounded Optimism

Individual investors expect roughly twice the yearly returns forecast by their advisers and investment managers.

The newly published 2019 Individual Investor Survey from Natixis Investment Managers offers an in-depth look at the hopes and expectations of global investors for the near and long term.

Across the global equity and fixed-income markets, investors voice mixed optimism and pessimism for the coming 12 month period. Many say they felt caught off guard by bouts of volatility experienced in late 2018 and early 2019.

Natixis also provided a cut of the data focused on U.S. investors, showing that more than half say volatility made them realize index funds were riskier than they previously thought. U.S.-based survey participants cite market volatility as the biggest threat to their investments this year, and nearly half (47%) would be willing to pay a premium for volatility protection. Nearly two-thirds (64%) are considering new strategies to help diversify their portfolios.

Perhaps the most striking finding in the U.S. is that, despite the volatility experienced in 2018 and 2019, investors’ long-term return expectations increased yet again in this edition of the survey, to a record high of 10.9% above inflation. This is nearly double financial advisers’ expectation of 6.3% returns for the U.S. equity markets for the coming year.

“The record bull market continues to create a growing disconnect between what investors expect from the market and what is realistically achievable, especially given their aversion to risk,” observes David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers.

Other findings show additional ways in which investors seem to be misinformed. According to the survey, just 30% of investors know that, when interest rates rise, bond prices fall as a general matter, and only 9% recognize that lower bond prices mean higher bond yields, or income, in the future. The data show just 2% of investors correctly understand that when interest rates rise, the price of bonds decreases and income received from bonds in the future increases. Sixty-four percent incorrectly believe investing in index funds helps minimize losses.

When asked to identify the biggest risks currently to their investments, investors cite market volatility (51%), political dysfunction (47%), a global economic slowdown (41%), rising interest rates (35%), trade disputes (26%), the low yield environment (22%), geopolitical disruptions (18%) and currency market volatility (11%).

For their part, investment experts are much more cautious about projecting another year of fantastic equity market returns, despite the fact that the first half of the year was excellent for investors, with the S&P 500 up 18.5%, developed country equities up 15%, and emerging markets up 11%. This was well above the expectations advisers and managers had published coming into the year.

Despite the unexpectedly high returns of the first half of 2019, looking forward, the experts remain modest in their expectations. They say stocks are approaching an expensive price to earnings (P/E) ratio—stock prices are at about 17-times expected earnings—and bonds aren’t cheap, either.

One fear that some economists and many investors share is that the U.S. could be heading into another recession. Allianz Life’s Quarterly Market Perceptions Study, for example, finds 48% of Americans fear a major recession, and 47% fear a major market crash. However, other economists are not as certain about a recession. Natixis’ experts say that the trade war tariffs and the slowing of global economic growth are increasing fears that a recession could happen, but they believe there is only a 30% chance of a recession in the near future.