New research reveals typical investors expect to make modest annual returns over the next three years.
So, what else does the research reveal about the expectations of investors? And which assets do investors believe will perform strongest? Let’s take a look.
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What did the data reveal about investor expectations?
According to research commissioned by Freetrade and InvestingReviews.co.uk, a typical investor expects to make average annual returns of 5.8% over the next three years.
This finding suggests typical investors do not expect their portfolios to outpace inflation in the near future. Right now, the UK inflation rate sits at 6.2%. Meanwhile, the Bank of England has suggested that inflation could go as high as 8% by June.
Despite these modest expectations, a smaller proportion of investors say they do expect to make returns higher than inflation. That’s because 19% of respondents say they anticipate returns of 10% or higher over the next three years.
To put these return expectations into context, in 2019, 2020 and 2021, the FTSE 100 delivered annual returns of 14%, -14%, and 12% respectively. Meanwhile, the FTSE 250 delivered returns of 25%, -6% and 14% over the same three-year period.
What else does the data reveal?
In addition to highlighting investor expectations, the data also reveals that almost half (49%) of those surveyed believe low-cost funds, such as exchange-traded funds, are likely to be the strongest performing assets over the next three years.
Meanwhile, 31% say that investing in individual stocks is likely to deliver the highest returns. Just 9% believe bonds will be the strongest performing asset.
Traditionally, bonds are seen as a low-risk asset class, and they are often the preferred choice for risk-averse investors. During times of economic uncertainty, bond prices traditionally rise, while yields fall. As a result, the 9% of respondents who suggest that bond prices may deliver the best results over the next three years may give an indication that some investors believe the stock market is in for a tough ride in the near future.
As well as highlighting expectations around different asset classes, the data also suggests many investors are confident about UK equities. That’s because the survey reveals that 20% of respondents say they intend to increase their exposure to UK assets. This compares to 4% who say they plan to reduce their exposure.
Dan Lane, senior staff writer at Freetrade, suggests the growing appetite for UK stocks may be fuelled by low valuations. He explains: “Maybe the UK market’s relatively cheap valuation is proving too hard to resist, or maybe the allure of US tech is waning slightly. Whatever the reason, the UK seems to be back on the menu in 2022. Investors will still need to maintain that long-term view though.”
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What’s the deal with inflation?
With inflation set to hit 8% by the summer, anyone with wealth should seriously consider where they put it. While any type of investing carries risk, cash stashed in a savings account will certainly see its real value eroded.
It’s not hard to see why this is likely to be the case. Right now, the highest easy access savings rate is just 1.5% AER variable. So, if inflation does reach 8%, even the highest savings rate will deliver interest that is just a fifth of the rate that prices are rising by.
Freetrade’s Dan Lane echoes this opinion about savings accounts. He says: “The wild swings over the past two years might have typified some investors’ entry into the market but the longer-term story has fewer episodes like that. What is clear though, is leaving your money in a cash account is really just not an option for anyone hoping to generate meaningful returns. It doesn’t carry the same risks as investing but cash drag is real.”
Lane goes on to explain that investors would be wise to choose their stocks very carefully, regardless of their worries about rising inflation. He explains: “Inflation might concern some investors, but that should make them look at their assets and how well-prepped their companies are to take charge of their own destiny regardless of what’s happening in the global economy.”
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