Last year’s bear market for both stocks and bonds did little to dampen investors’ unrealistic expectations about their future performance.
It’s urgently important for them to become more realistic. Only then can they begin planning for the retirement standard of living they can actually afford.
To appreciate how little last year’s losses affected investor expectations, consider the 2023 Natixis Global Survey of Individual Investors. On average, U.S. investors’ portfolio return expectation for the next decade has fallen from a ridiculously unrealistic 17.5% annualized above inflation to a merely outrageous 15.6%. That despite one of the worst years for stocks and bonds in U.S. history, with the S&P 500 SPX,
Consider what history tells us is realistic. Since 1793, the U.S. stock market’s average real total return has been 6.1% annualized, and long-term Treasury bonds’ has been 4.0% annualized. (These returns courtesy of data from Edward McQuarrie of the Leavey School of Business at Santa Clara University.) In other words, the average investor believes that over the next decade he can do nearly three times better than stocks’ historical return and nearly four times better than bonds.
We know that’s wildly unrealistic because the vast majority of investors—90% or more—don’t even do as well as the market averages. So even if stocks’ and bonds’ returns over the next decade are as good as they have been over the last 230 years, the typical investor will almost certainly do worse than those assets’ historical averages.
Yet even that is too optimistic, since the stock market is extremely overvalued right now according to almost any valuation indicator with a good long-term record. Odds are that stocks will not even do as well over the next decade as they have historically.
It takes a long time to wring extreme optimism out of the market
One takeaway from the Natixis study is that investor optimism builds up over time, which implies that it will take several years of losses for investors to become more realistic. That’s a sobering prospect, given that last year’s losses—severe as they were—did not even come close to doing the trick.
Take a look at the table below, which shows what investor expectations were in each year’s Natixis study over the last five years. Notice that in 2019, investors’ expectations for their portfolios’ returns over the subsequent decade were less than what the S&P 500 had actually produced over the trailing decade. This year, in contrast, investors’ average expectation is 6.4 percentage points higher than the S&P 500’s trailing-decade return. This differential is even greater than it was last year, when it stood at 5.7 percentage points.
| Year | S&P 500’s trailing 10-year total real return (annualized) | Bonds’ trailing 10-year total real return (annualized) | Expected portfolio total real return over subsequent 10 years (annualized) |
| 2019 | 13.3% | 1.0% | 10.1% |
| 2020 | 9.1% | 3.5% | 16.5% |
| 2021 | 12.3% | 1.9% | 17.3% |
| 2022 | 11.8% | -0.9% | 17.5% |
| 2023 | 9.2% | -2.0% | 15.6% |
As Dave Goodsell, author of the Natixis survey report, puts it: “It appears that after more than a decade of outsized returns, investors have been conditioned to expect high returns.” Goodsell is executive director of the Natixis Center for Investor Insight.
What should retirees and near-retirees do when their actual returns fall short of their inflated and unrealistic expectations—as they almost certainly will? Perhaps the worst thing would be to pursue riskier and more aggressive strategies, in the futile hope of making up for their past returns. That only compounds the problem.
Yet, according to the Natixis survey, 38% of investors in this year’s survey indicate that “they need to invest more aggressively to make up for the ground they lost in 2022.”
Don’t make the same mistake yourself.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
