Do you have realistic expectations for investment returns?

Category: Investing

Do you have realistic expectations for investment returns?

When you invest, how much do you expect to receive in return? A survey suggests that some investors have unrealistic expectations of investment returns that could affect their long-term financial security.

Research from Aegon found that half of UK adults have put money into investments because interest rates are low. Low interest rates can mean lower returns from traditional savings products, which is why investments can start to appear attractive. While this can be a positive step for long-term financial security, it’s important to understand the risks and potential returns of investing, as well as whether your expectations are realistic. Read on to find out if your assumptions for the performance of your investments are sensible.

A man pointing to a screen showing data on a chart, illustrating an article on realistic expectations for investment returns

Before you decide to invest, it’s important to make sure it’s the right decision for you. Here are three things you should consider first:

  1. What is your goal? Investments experience volatility and their value will rise and fall. In most cases, you should only invest with a minimum time frame of five years to allow the peaks and troughs to smooth out.
  2. Do you have an emergency fund or liabilities? Ideally, you should hold some form of accessible savings for emergencies and clear any outstanding liabilities before considering investing. Worryingly, 10% of people said they had invested all their extra cash, which could leave them financially vulnerable.
  3. Do you understand investment risk? All investments will have some level of risk, so you should consider what would happen if the value of your investments were to fall.

Deciding to invest is often a decision best made with professional assistance. Financial planning firms are ideal for this purpose. If you decide to invest, they will assist you in considering and setting realistic expectations.

What are realistic expectations for investment returns?

Investment returns cannot be guaranteed, and the potential returns will vary depending on the investment.

As a general rule of thumb, the more investment risk you take, the higher the potential returns. However, this doesn’t mean you should automatically invest in these kinds of investments. High-risk investments are unlikely to be suitable for the majority of investors, even when the potential returns are high. The level of risk you should take will be different to the next person. Everyone has their individual attitudes and tolerances towards risk, as well as requirement to take risk and capacity for loss.

Once your risk level is established, what is realistic in terms of expectations will very much depend on the investments you choose.

According to Credit Suisse’s Global Investment Returns Yearbook 2021, over the last 40 years, returns from world equities have been 6.8% a year. In contrast, the Aegon survey found that it’s only when an investment promises a return of 10% or more that the majority of investors become sceptical. The findings suggest that some investors expect investment returns that are much higher than average.

The dangers of unrealistic investment expectations

Imagine you are heading solo into the wide world of investing with the idea that you should be seeing returns of 10% each year. It isn’t difficult to therefore also imagine that if you received the above average return of 6.8%, you would be disappointed. As well as disappointment, your investments not meeting your expectations can also have larger consequences.

1. It could affect other financial and lifestyle decisions

Financial decisions not meeting your expectations can have a serious impact on your goals. If you were expecting investments to deliver a 10% return, you may have planned to retire early, for instance. Or you may increase your spending in light of this expectation.

Unrealistic expectations can mean you make additional decisions based on this information that are not right for you. To create a reliable financial plan, you need to work with information that is as accurate as possible. That means including investments returns that are realistic.

2. It may leave you vulnerable to scams

One of the signs of a scam is unrealistic investment returns. However, if your expectations are skewed, you may not spot a scam until it’s too late. The research found that just 35% of investors would avoid opportunities that promised high returns. Worryingly, 5% admitted they are less concerned about safety, and always look at investments offering the best returns.

In most cases, money lost to scams cannot be recovered. Taking your time to review investments is important. Keep in mind that investment returns cannot be guaranteed and if it sounds too good to be true, it probably is.

How financial planning can you manage investment expectations

Whether you’re new to investing or have built up a portfolio over the years, getting a second, experienced, opinion can help. We can demonstrate how different investment outcomes would affect your wealth and help you create long-term plans that give you confidence in the future. We’ll help you understand what you can expect from your investments, and what opportunities may be right for you.

Please contact us if you’d like to talk about investing and how to make it part of your wider financial plan.


Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Chambers Smith is authorised and regulated by the Financial Conduct Authority. You can find Chambers Smith on the FCA register by clicking here. Under reference 488279. Registered in England & Wales. Company number: 06674780. Registered Office: 2 Cheapside, Derby, England, DE1 1BR.

The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details can be found by clicking here.

The guidance and/or advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK. The FCA does not regulate tax or estate planning.