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I came across this interesting table in the 2023 Natixis Global Survey of Individual Investors. It shows the discrepancy between what individual investors want and what wealth firms believe is realistic, after accounting for inflation (i.e. the long-term real rate of return).

In short, professionals believe ~7% investment return is probable over the long term, whereas investors are looking at ~10%+. Unfortunately, what this creates is an unhappy investor and a frustrated advisor. So, who is right and how do you address the balance?

To investigate this, I’m going to focus on the US where individual investors believe they should be achieving ~15% as a long term investment return whereas advisors believe ~7% is more realistic.

To help contextualise this, I’ll borrow Blackrock’s long term (20 years) capital market assumptions for asset return expectations. It’s impossible to predict the future of course, but utilizing the assumptions from one of the world’s largest asset managers should bring more credibility to the exercise. This doesn’t mean the individual investor or wealth advisor is necessarily wrong – everyone has an opinion. It is just framing those opinions against the opinion of Blackrock.

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The first point to note is that none of the central expected returns across a multitude of asset classes come close to what individual investors in the US are expecting. If looking at the right-hand side tails, there are certain scenarios where investments in US Private Equity and Chinese stocks could match these expectations. However, realistically, a US individual investor is unlikely to be allocating all their portfolio to these asset classes and may not even have the minimums required for PE investments.

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More likely, would be an overallocation to US equities but even here Blackrock suggests 6.4% is a good base case long term assumption and 10.3% would represent the top end when modelling scenarios.

Interestingly, the central expectations for a traditional 60/40 portfolio are slightly higher than for pure US equities, albeit the range of possible returns is narrower (likely due to the lower expected volatility).

What’s not factored here are expectations around growth stocks, which have been the main investment story over the past few years. Indeed, this infographic from Visual Capitalist , highlights the enormous outsized returns from the Magnificent 7 which represent over 25% of the S&P 500.

If individual investors had exposure to any of these stocks, it could explain why their future expectations of returns are seemingly high, when compared to what Blackrock thinks. The question for the investor is whether these growth stocks continue to trend above the other 493 stocks, but also whether it is prudent for an individual investor to over allocate or completely allocate to those types of stocks.

Nevertheless, looking at the predictions given by advisors, they at least have esteemed company in that Blackrock largely shares their views, especially if you subscribe to the belief that the 60/40 portfolio is the mainstay of investment advice.

So how does a wealth advisor help eliminate the discrepancy between what they think is achievable for a client’s investment portfolio and what the client thinks themselves? We explore this topic in our next article.

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