Pattie Lovett-Reid: Setting realistic goals for your portfolio
Canadian investors are emerging from COVID-19 with some pretty higher return expectations on their portfolios.
Investors are looking for 10.6 per cent returns above inflation this year and that is on top of average reported gains of 11 per cent in 2020.
In other words, according to Natixis Investment Managers, Canadian investors are looking for long term return expectations that are 15 per cent higher than before the pandemic began – and two times more than the 5.1 per cent returns financial professionals say is realistic.
Why is this happening?
It is referred to as the "recency bias" – many investors have embraced the concept if their portfolios did really well during the pandemic, they will do really well during the recovery.
However, that is not how the markets work and to achieve those outsized returns investors have to be willing to take on more risk...not something most are willing to do.
- 71 per cent recognize market swings up or down of 10 per cent is normal
- 69 per cent agree that volatility can create opportunity
- Yet 56 per cent aren't willing to take on more risk and 78 per cent would choose safety of asset protections over investment performance
We have often heard the rich are getting richer and the impact of the "k" shaped recovery. The poor are getting poorer.
This survey was the target of those with over $100,000 of investable assets. And respondents to the poll seemed to have emerged from the pandemic relatively unscathed. Sixty-nine per cent said they have had no negative health or financial impacts. In fact, fewer than four per cent said they or a member of their household caught COVID-19.
While return expectations are completely unrealistic there were positive takeaways:
- Spending: 42 per cent of investors recognize the importance of keeping their spending in check
- Saving: 27 per cent said the pandemic taught them the importance of an emergency fund
- Investing: After a year that saw the swiftest market downturn and recovery on record, 19 per cent said the experience taught them the importance of understanding the risk they were taking on and 20 per cent learned they need to avoid making emotional investment decisions
Bottom line: investors may be worried about large unexpected expenses, the prospect for higher taxes and a slow economic recovery but I believe the biggest fear should be their totally unrealistic return expectations.