Everybody Wants a Prize!

July 22, 2019

For those of us who spend every day deeply immersed in financial markets, it is nice to take a step back and see how normal people perceive the investment world. Schroders, a $500 billion global asset manager based in London, recently conducted a survey of more than 25,000 investors from 32 countries across the globe (download the full report here). We have some investments with Schroders indirectly through a Vanguard strategy we utilize, so the research crossed my screen. Many of the findings were predictable, but some struck me as quite surprising.

On the predictable side, most investors (65%) prefer the majority of their funds to be invested in their home county or in countries familiar to them, while a minority of investors (33%) prefer a mix of geographical areas be covered by their portfolio. The home bias was more pronounced in Asian countries than here in the U.S, and was most pronounced in India.   

On the surprising side, most investors have unrealistically high annual return expectations. I’m not naïve, I know expectations are high, I just didn’t realize they are this high! On average, global investors expect to achieve 10.7% annualized returns over the next five years. For context, Vanguard’s Capital Markets Model suggests five-year annualized returns for global equities will be around 5.2%, less than half of what investors expect to achieve. Even more surprising, investors who identify themselves as expert or advanced expect to achieve even higher returns (12.2%) versus investors who identify themselves as beginners (8.3%). Perhaps most surprising of all is that one out of every six investors expects to achieve over 20% compound annual returns for the next five years. Wow! That would double their money roughly every 3.8 years. Is that realistic? I don’t often get to say this, but I know hedge fund managers who aren’t that brash.

No one knows what the future holds, but I have a high level of confidence in the work done by Vanguard’s capital markets team. Their work suggests we should be prepared for somewhat lower returns going forward. Global diversification will likely provide some benefits to portfolios including increased potential returns and decreased potential volatility. No one knows for sure, of course, but it has worked that way in the past.

If Vanguard’s estimates are in the right neighborhood, then a diversified public investment portfolio might double in the next 14 years or so, give or take. Investors who break free from their home country bias, and tilt more towards international and emerging markets, might be able to double a portfolio a bit more quickly. These expectations strike me as more realistic. They are based on thoughtful and considered research by subject matter experts who are less biased than many we hear from. And, if Vanguard’s estimates turn out to be ridiculously low, then everybody gets a prize! 

Mike Masters