Bullish or foolish? UK investors expect 8.7% annual returns over the next five years

UK investors are arguably expecting unrealistically high returns on their investments over the next five years, new research has found.

In a survey carried out by Schroders, the fund manager, 1,000 UK investors were asked to state their return expectations for the next five years. Rather than adopting a pessimistic outlook, at a time when there’s plenty of uncertainty on the horizon, most notably concerns over how the Brexit negotiations will pan out, investors were bullish in saying they expect an average annual return of 8.7 per cent over the next five years. 

Such optimism is magnified in the expectations of millennials, nearly half of whom expect a minimum return of 10 per cent a year. Almost one quarter expect more than 15 per cent.

This is at odds with historical data. Figures from the 2016 Barclays Equity Gilt Study shows that British shares over the past 116 years have typically returned 5 per cent annually (including share price growth and dividend payouts). In further contrast to investors’ expectations, average annual returns provided by world stock markets (with dividends reinvested) have been 7.2 per cent over the last thirty years.

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‘Investors’ expectations for returns of nearly 9 per cent over the next five years look very optimistic,’ notes James Rainbow, co-head of Schroders UK intermediary business.

Further, Rainbow adds the UK stock market has enjoyed a ‘remarkable rally in recent years’, which has ‘probably buoyed confidence’. But, he cautions, on the back of such strong performance investors should rein in their expectations.

He adds: ‘Much of the strong performance is due to the extreme actions taken by central banks to stimulate the economy. The broader picture is that we’re in an age of low rates and low growth. It’s therefore wise to expect lower returns.’

Moreover, the study also found that despite high expectations on returns, UK investors are currently averse to taking on too much risk. Almost 60 per cent of those polled said that they do not want to take on as much risk in their investments now. 

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