When Reality Confronts Investor Expectations


A recent survey of 1,050 American investors conducted by Natixis Global Asset Management found that they said they needed average annual returns of 9.8% above inflation to meet their financial needs such as providing income in retirement, housing expenses, and health care expenses.1 At the same time, 56% of the respondents said they were willing to take only minimal risk to achieve high yields. To us, this is the equivalent of saying that they want to have the thrill of skydiving but they are unwilling to jump from anything higher than ten feet off the ground. It’s just not going to happen. Making matters worse, 79% of the respondents said they simply followed their gut instinct when making investment decisions, 50% have no defined goals, and 54% lack a financial plan.

To see just how unrealistic these expectations are, let’s look at some data. For the fifty years ending 12/31/2013, IFA’s Index Portfolio 100 (a heavily small-cap and value tilted portfolio) had an annualized return of 13.11% which is almost exactly 9% above the rate of inflation (as measured by the CPI) over that period. If we look at the longer 86-year period, the difference drops down to 8%. Bearing in mind that Index Portfolio 100 has far more risk than what most investors can hold, especially over their whole working lifetimes, there is no conceivable way they are going to get the 9.8%. Even if they somehow got the return of the S&P 500 (which most investors dismally lag, according to DALBAR’s “Quantitative Analysis of Investor Behavior”), it would still be unlikely to suffice.

There is no question that when we compare American’s actual savings to what they will need for retirement, we see a situation that can best be described as dire. The most recent Retirement Confidence Survey conducted by the Employee Benefit Research Institute found that 36% of all workers have less than $1,000 saved for retirement, 60% have less than $25,000, and 78% have less than $100,000. Among retirees, 29% have less than $1,000, 58% have less than $25,000, and 73% have less than $100,000. Unless they are fortunate enough to have a pension income, they are relying on Social Security. The question of whether Social Security is viable at its current tax rates and benefit levels we will leave for another time.

This survey is certainly not the first to reveal investors’ unrealistic expectations, nor will it be the last. As the CEO of Natixis John Hailer noted:

“This demonstrates a great opportunity for financial advisors and the industry to help educate investors on realistic expectations and strategies to reach their goals. Investing today is complicated, and there’s a lot of noise in the market. It’s no wonder investors are conflicted.”

While we certainly agree with Mr. Hailer’s statements, we have a difficult time seeing Natixis as part of the solution rather than part of the problem, as most of the funds they provide are high-cost actively managed funds. According to Morningstar, their average domestic equity fund has an expense ratio of 1.40%, and their average taxable bond fund comes in at 1.14%. These are strong headwinds against investors trying to meet their goals, no matter how unrealistic.

We at Index Fund Advisors will continue to do our part to educate investors on realistic expectations and the proper strategy to give them the highest probability of reaching their goal—a globally diversified portfolio of index funds matched to their risk level. To find a risk level that is right for you, please take IFA’s Risk Capacity Survey.