One of the greatest TV game shows of all time is Family Feud. The old episodes with Richard Dawson as host were the best. As the years have gone on, the survey questions have gotten wackier. That brings us to a recent financial survey that shows some wacky results.
The Problem with Surveys
Financial media stories that begin with the phrase, “A recent survey found…” often tell a narrative that is disconnected from reality. Surveys can be deceiving. When was the last time YOU took part in one of these questionnaires? I’m not sure who exactly is participating in these things!
The latest one to catch our eye came from an outfit called Natixis Investment Managers.[i] The study found that investors expect ENORMOUS returns in the future. I’m not sure how realistic the survey data is, but it helps tell a true narrative—recent stock market gains and a strong economy don’t last forever. Nor should we expect them to.
Stocks For the Long Run
Let me clarify: The stock market is one of the best vehicles (maybe the best) to provide long-term returns that will beat inflation—so long as you keep a disciplined approach of owning diversified assets, rebalancing, and keeping the right level of portfolio risk.
But the stock market won’t make you rich overnight or even over a few years. Building wealth in the market feels so slow at first, but as the years’ progress, you begin to notice how awesome compounding returns are.
The survey results, pictured below, suggest investors have expectations that are way too high. On average, stocks provide returns that are about 4-5% above inflation through the decades.[ii]
Survey says…investors think returns will be nearly 10% higher than what history has shown us!
Survey: Individual Investor Return Expectations Continue to Rise (Natixis)
The Experts Weigh In
To make matters worse, equity market returns could be muted going forward if the big Wall Street “experts” are correct (the experts are often wrong, so be careful)
A Morningstar article earlier this year featured a collection of stock market forecasts.[iii] Pictured below, you’ll notice that the professionals are not so excited about returns looking ahead 10-15 years.
Professional Opinions on Future Returns (Morningstar)
Behavioral Biases (We All Have Them!)
What could be driving such optimism among individual investors? Recency bias.
Take the last 10 years in the US stock market as an example. The total US stock market has compounded at an annual rate of 15% from a decade ago. The growth rate is a whopping 18% per year in the last five years. Many of the meme stock traders were in kindergarten the last time the S&P 500 was in a prolonged bear market.
While future returns will likely disappoint investors, the good news is that for those with a time horizon beyond 10-15 years (i.e. Millennials saving for retirement), equity returns should revert to the historical mean. That suggests the benefits of periodically investing your 401(k), IRA, and other accounts will serve you well if you give it time. Waiting can be the hardest part though.
By the Way—The Economy Remains Strong
Adding to the positive equity market recency bias is what is happening in the economy. Just last week, the Bureau of Labor Statistics revealed that the country added 850,000 new jobs, beating economists’ expectations.[iv] While we don’t advise you to stay glued to the financial news, optimism is abundant when you flip on CNBC.
All of this feeds into investor sentiment that could be reaching levels that are a bit frothy.
The Point
Ignore surveys. Don’t look at the news too much. Focus on your situation. Build good financial habits.
If you do those things, chances are you will do well over the long haul as an investor.
As we progress through the second half of the year, you’ll read about tax changes, uncertainty in DC, and retirement rules adjustments. These are important matters when it comes to planning for your future. The Weekly Happenings report will keep you abreast of the key items while avoiding the noise.
We’ll talk soon!
[i] https://www.im.natixis.com/us/resources/2021-natixis-global-survey-of-individual-investors-executive-overview
[ii] https://www.mindfullyinvesting.com/historical-returns-of-global-stocks/
[iii] https://www.morningstar.com/articles/1018261/experts-forecast-stock-and-bond-returns-2021-edition
[iv] https://www.cnbc.com/2021/07/02/jobs-report-june-2021.html