(Bloomberg Gadfly) — There’s an amazing amount of denial going on right now.
Investors are simply ignoring current market dynamics and are still expecting average annual returns of 8.6%, according to a Legg Mason Inc. survey of income investors released this week. Those who were employed expected more than 9% gains, with retirees expecting less. Actual returns have come in markedly lower of late, but hopes remain high.
This is wishful thinking at best and dangerous at worst. Today’s stock and bond markets are profoundly different from those in decades past. Bond yields are near all-time lows. Stocks aren’t paying that much relative to history in terms of earnings yield. Yes, prices could continue to rise, but that’s becoming less certain as central bankers seek to tighten monetary policies and valuations get increasingly squeezed.
This new dynamic is no secret to anyone who manages money professionally. It’s alarming that the hundreds of investors surveyed by Legg Mason still have such unrealistic expectations. Alan McKnight, chief investment officer at Regions Wealth Management, said he had seen similarly over-optimistic expectations from nonprofessional investors he’s spoken with. “People want to look on a historical basis as to what they should expect in the future,” he said Friday on Bloomberg Radio.
A More Likely Outcome: 5%