“What is a realistic return on investments?”
When you invest, how much do you expect to receive in return? A recent survey suggests that some investors have unrealistic expectations that could affect their long-term financial security.
Research from Aegon found that half of UK adults have put money into investments because interest rates are low. While this can be a positive step, it’s important to understand the risks and potential returns.
Of those that decided to invest, 35% said interest rates falling to between 1 – 2% was the tipping point, and a further 39% said it was when interest rates fell below 1%.
Before you decide to invest, it’s important to make sure it’s the right decision for you. Here are three things you should consider first:
1. What is your investment objective? Investments experience volatility and their value will rise and fall. In most cases, you should only invest with a minimum time frame of five years to allow the peaks and troughs to smooth out over time.
2. Do you have an emergency fund? Ideally, you should retain some of your savings in an accessible account for emergencies. Worryingly, 10% of people said they had invested all their extra cash, which could leave them financially vulnerable
3. Do you understand investment risk? All investments have some level of risk, so you should consider what would happen if the value of your investments were to fall.
What are realistic investment expectations?
Returns cannot be guaranteed, and will vary depending on the specific profile of each investment.
As a general rule of thumb, the more investment risk you take, the higher the potential returns. However, this doesn’t mean you should automatically invest in high-risk investments. High-risk investments are unlikely to be suitable for the majority of investors, even when the potential returns are high.
According to Credit Suisse’s Global Investment Returns Yearbook 2021, over the last 40 years, returns from global equities have been 6.8% a year, on average. The returns from global bonds have been 6.2% a year, on average.
The report does however note that “extrapolating bond returns from the last 40 years into the future would be foolish. That was a golden age for bonds, just as the 1980s and 1990s were a golden age for equities.”
The survey by Aegon, suggest that some investors expect returns that are even higher.
The dangers of unrealistic investment expectations
Your investments not meeting your expectations can be disappointing, but it could have larger consequences too.
1. It could affect other financial and lifestyle decisions
Unrealistic expectations can have a serious impact on your objectives. If you are optimistically hoping for investments to deliver a 10% annualized return, your plans to retire early may be unrealistic, for instance.
To create a reliable financial plan, you need to work with information that is as realistic as possible. It’s worth considering several scenarios based on varying levels of return.
2. It may leave you vulnerable to scams
One of the signs of a scam is unrealistic investment returns. However, if your expectations are skewed, you may not spot a scam until it’s too late. Research found that just 35% of investors would avoid opportunities that promised high returns. Worryingly, 5% admitted they are less concerned about safety, and always look at investments offering the best returns.
In most cases, money lost to scams cannot be recovered. Taking your time to review investments is important. Keep in mind that investment returns cannot be guaranteed and if it sounds too good to be true, it probably is.
How financial planning can help
Whether you’re new to investing or have built up a portfolio over the years, getting a second opinion can help. We can demonstrate how different investment outcomes affect your wealth and help you create long-term plans that give you confidence in the future.
We’ll help you understand what you can expect from your investments, and what strategies are right for you.
Please get in touch if you would like to discuss how best to target investment returns that allow you to meet your objectives, whilst managing investment risk.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
