Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 291

Great investment expectations are deluded

Sadly, investors lost one of their greatest advocates recently, when Jack Bogle, the founder of Vanguard and a pioneer of the index investing movement, passed away. Jack’s legacy is that he created a practical real-world application for a well-established academic idea. The efficient market hypothesis holds that the current price of an asset should already fully reflect all available information. Given this, it should be impossible to outperform the market by actively picking stocks or bonds.

Unrealistic expectations for stable returns

While in the real world, the idea of efficient markets is more a useful framework than an established investing law, over the long run, market returns dominate the outcomes of most traditional buy-and-hold investment strategies. For a typical long-only stock portfolio, market returns will usually explain at least 80% of total portfolio return over time. Mr Bogle identified that the investment returns in the traditional mutual funds could be replicated for a fraction of the cost than was being charged.

The ‘Vanguard effect’ forced a dramatic re-pricing of fees across the investment management industry. It also established a fair hurdle that all active managers must beat to justify their existence. Perhaps more important, Mr Bogle’s crusade brought home to ordinary investors one of the most important underpinnings of investing: the fallacy that it is easy to consistently and predictably outperform the market.

The idea that beating the market should be thought of as hard and unpredictable is a vitally important concept with a number of significant implications.

Consider how many investors set their own investment expectations. Surveys typically show that investors are wildly optimistic when it comes to their own investment goals. For example, a 2017 global investor survey by Schroders found that 41% of Australian investors expected annualised returns of over 10% from their whole portfolio over the following five years. Similarly, the most recent ASX Australian Investor Survey (prepared by Deloitte Access Economics) showed that the average return expectation for an Australian investor was 9%. Even more revealing are the acceptable risk tolerances. Fully 67% of Australian investors surveyed by the ASX held a risk appetite that accepted only ‘guaranteed’ or ‘stable’ returns. Indeed, the most prevalent investment held was cash, with 56% of those surveyed putting their savings in the bank, compared to only 51% who owned some shares.

An inconvenient truth on investment returns

Humans are emotional actors. When investing, we are prone to behavioural biases such as over-confidence and trend-chasing. The highly-ambitious double digit return expectations could only apply to investors willing to bear the risks in a portfolio solely invested in higher-risk assets, like shares or private equity. There is of course nothing guaranteed, and very little that is stable, about investment into these sorts of asset classes.

Determining reasonable ‘long run’ return assumptions for an asset class is an inherently problematic exercise. Most academics and industry experts would hold that long run share market return expectations should be somewhere between 5% to 8% a year. While global share market returns have annualised at 9.7% in A$ terms over the last 10 years, over the last 20 and 30 years (horizons picking up both bear and bull markets) these returns have been 3.7% and 7.1% respectively.

It is a particularly optimistic investor who uses a long-run return expectation of greater than 10%, even for a portfolio consisting only of shares. With cash rates for retail investors at only 2%, such returns are herculean for investors with a low risk tolerance (ie guaranteed or stable returns). Under the efficient market paradigm, it is impossible to outperform the ‘market’ while taking significantly less risk than the market.

We live in a world of low nominal growth and ultra-low interest rates that looks very different to the past. Over the 10 years leading up to the GFC, the average Australian cash deposit rate was 5.5% and real economic growth averaged 3.6%. Today, growth is running at 2.8% and cash returns are 2%. Economic theory tells us that, short of significant technological change (a possibility), future returns for investors should be a function of current interest rates and expected economic growth.

In the real world, markets are not efficient. There are managers and investment strategies that have shown that they can, to some degree, bend the risk-versus-return equation in favour of investors. Indeed, many of these strategies and managers can now be accessed by retail investors via the ever-expanding breed of new LICs and ETFs arriving onto the ASX. There is a limit however to what investors should let themselves expect as no manager or strategy will perform as hoped all the time.

Hope is not a strategy

For the first time in years, many investors will have suffered losses over the calendar year of 2018, particularly over the final six months. While painful, times like this can serve as a great test to see if your risk profile matches your risk tolerance in both the good years and the bad. If your losses were greater than what you willingly accept from time to time, ask yourself some questions about what you should realistically expect and the risks you are willing to take to get there.

Judging by the survey findings, the average investor today expects high returns from a low growth, low interest rate world. Over the long run, those are not safe assumptions to make when planning for important savings goals like retirement. Happily, there is one sure-fire way to bridge the gap between unrealistic expectations and needing to provide for your retirement. It’s not very glamorous and we’ve all heard it before. Save more.


Miles Staude of Staude Capital Limited in London is the Portfolio Manager at the Global Value Fund (ASX:GVF). This article is the opinion of the writer and does not consider the circumstances of any individual.


The potential of smart beta


Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates


Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?


Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.


Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.