Let us hope without a repeat of the 1929 great depression, although that would be 9 years away.
So what can we expect going into 2020 and the next decade?
A recent study conducted by Schroders can throw a fair amount of light on this. It showed that people lack confidence in exactly how much money they have invested, and where it is. Only 44% of people were confident with how much money they have with various financial providers, and this reduced sharply for those with less investment knowledge.
People in general, where not satisfied with the performance of their investments with over half stating they had not achieved what they wanted with their investments over the past five years, and most attributed their own action or inaction as the main cause of this failure. Globally, there’s a clear need to be more patient with investments.
The average holding period before changing or cashing in an investment was 2.6 years, which is just over half the five-year term I would suggest and generally recommend to stay invested for. It was clear that many have an unrealistically high annual return expectation. Investors are expecting on average a high 10.7% return per year over the next five years, while one in six expected at least a staggering 20% annual return on their portfolio.
There was a general home bias for investments, and people are split over the benefit of investing in emerging markets. 31% of people preferred the majority of their portfolio in funds that invest in their home country, whilst a further 34% preferred investing in countries familiar to them. Only 31% of people globally feel emerging markets could be beneficial to their portfolio, and almost a quarter thought it is too risky to do so. That I don’t personally agree with for the next year, so I sit firmly in the camp of the other 75%.
Millennials are less patient than older generations, moving investments elsewhere or cashing in less than every two years (1.9 years). Noticeably more frequent than Generation X (2.7 years), Baby boomers (3.7 years) and the silent generation (4 years). Millennials are also more likely to make reactive decisions in the face of volatility, with 15% of people of this age group agreeing they are likely to do this in times of instability. This again is negatively correlated to their age group, with only 4% of the silent generation feeling they will behave this way.
Geographically, those in the Americas had the highest expectations (12.4%), compared to a slightly more realistic 9% in Europe. Surprisingly, when looking at self-purported investment knowledge, expectations for investments rose for those with more knowledge. This suggests to me that inflated return expectations are not only due to a lack of experience. The below is showing just how investors think their returns should be going forward in percentage terms. The second and third lines are the sensible ones and thankfully where the majority sit. The real range should be between 8% and 12% per annum depending on appetite towards risk.
Unrealistic Expectations Cause Discontent
Unrealistic Expectations Cause Discontent
People also seem to be blaming themselves for investment performance. All the high-ranking reasons related to people blaming their own actions, or inactions were anything from the length of time invested to the level of risk taken and whether advice was taken from an adviser or peer.
Some believe (as do I) that emerging markets are well positioned as a good source of potential long-term returns. Despite that, people appeared to lack interest in investing in emerging markets, with only 31% of people feeling it could be beneficial to their portfolio, and almost a quarter thinking it is altogether too risky. That figure is slightly higher when discussing emerging markets with investors in Asia who believe that investing in emerging markets could be beneficial to their investment portfolio. This goes back to the point raised of not listening to an advisor or peer earlier.
The general feeling is that the next decade is set to deliver returns that don’t match the expectations of investors. Certainly not at the 20% level per annum. But that figure hasn’t been realistic either in any part of the last decade so shouldn’t suddenly be realistic today. When compared to current bank interest rates which are now negative in many countries including the European Central Bank, Japan, Sweden, Denmark and Switzerland – to expect 20% is not really well thought through.
Emerging markets and commodities should be high on the radar along with a well-diversified portfolio including different industry sectors and jurisdictions. Specifically you should be turning your attention to India, China and most certainly Taiwan after the recent election win. Historical highs probably coming there this year (you heard it here first). This year is going to be very much about picking the right stocks and watching geopolitical movements. Its all about getting it right in the first quarter!
Contact Lawrence Young directly at lawrence.young@holbornassets.com if you need more advice.