What can you really expect to earn on investments?
The downside is that it takes time. It’s human nature that many of us want to get there sooner rather than later. Not surprisingly I’m often asked about investments that pay supersized returns, and this reflects what are often unrealistic expectations.
A global survey by Schroders a few years ago, highlighted just how overly optimistic people can be when it comes to investment returns. The study found consumers, on average, expect to earn at least 10% annually. More than one in 10 expect an extremely ambitious annual return of at least 20%. Millennials prove the most ambitious in their expectations, with hopes of an average yearly return of 11.7%.
So, what sort of returns can you reasonably expect to earn on well-managed and well-regulated investments, which in my book are the only sorts of investments worth considering. As a guide, over the past 10 years, Aussie shares have delivered total returns – capital growth plus dividends, averaging about 10.08% annually[1]. International shares have notched up gains of 13.47% annually[2] over the past decade.
Both figures should keep investors happy. But remember the risk/return balance. Shares do carry more risk. Ironically, the same Schroders survey found that while people are keen to earn big returns, they often get cold feet at the thought of more risk.
The solution lies in building a diverse portfolio. It means spreading your money across a variety of investments in line with how you feel about risk and your investment timeframe – shares, for example, are generally seen as a long term asset that should be held for 7-years-plus.
Sure, you could tip money into something like Bitcoin, where no doubt some people have made spectacular gains. What we hear less about is those who have copped spectacular losses. If you’re not convinced, consumer watchdog the ACCC has warned that investment scams cost Australians over $70 million in the first half of 2021 – and more than half of these losses were to cryptocurrencies.
The upshot is that if you see sky-high returns being promoted, it’s a fair bet you’re looking at taking on considerable risk. In plain English, that means there’s an increased chance you could lose your dough. The other possibility, especially if high returns are being touted as having low risk, is that you’re looking at a scam, in which case it’s almost certain you’ll lose whatever money you tip in. It all comes back to the old mantra ‘if it looks too good to be true, it probably is'.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
[1] https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200/#overview
[2] https://www.msci.com/documents/10199/49479550-e805-4895-ba73-2893b1f3d60b
Frequently Asked Questions about this Article…
Realistically, you can expect well-managed investments to yield returns similar to Aussie shares, which have averaged about 10.08% annually over the past decade, and international shares, which have seen gains of 13.47% annually. It's important to balance these expectations with the understanding that higher returns often come with higher risks.
Many investors have unrealistic return expectations due to a desire for quick financial gains and a lack of understanding about the risk-return balance. Surveys have shown that people often expect returns of 10% or more annually, which can be overly optimistic.
Managing investment risk effectively involves building a diverse portfolio. This means spreading your investments across various asset classes, such as shares, bonds, and real estate, in line with your risk tolerance and investment timeframe.
Yes, high-return investments typically come with higher risks. If an investment promises sky-high returns with low risk, it might be a scam. Always remember the mantra: 'if it looks too good to be true, it probably is.'
Investing in cryptocurrencies can be highly risky. While some people have made significant gains, others have suffered substantial losses. The ACCC reported that over $70 million was lost to investment scams in the first half of 2021, with more than half of these losses related to cryptocurrencies.
Shares are generally considered a long-term investment and should ideally be held for at least 7 years to see good returns. This timeframe helps to ride out market volatility and capitalize on potential growth.
Be cautious if you encounter an investment opportunity promising high returns with low risk. It could be a scam. Always conduct thorough research and consider seeking advice from a financial advisor before investing.
Diversification is important because it helps spread risk across different investments. By not putting all your eggs in one basket, you can protect your portfolio from significant losses if one investment performs poorly.