Risk-averse investors over-optimistic about near-term returns

Dice on graphs

Investors lack joined-up thinking when it comes to expected returns versus the level of risk necessary to achieve them, with many investors preferring both short-term returns and lower-risk assets.

According to research by Schroders, 85 per cent of UK investors said they made a profit from their investments in the past 12 months and 4 per cent reported a loss, with returns averaging 7 per cent.

UK investors expect to see average returns of 8 per cent. Globally, investors are reporting increased confidence and expectations of double-digit returns in the 12 months to come.

Despite this optimism however, many don't seem to realise the increased level of risk they will need to take on in order to have a reasonable chance of gaining that level of return in the next year.

WORRYING OVER-CONFIDENCE

On average, UK investors are looking to place only 14 per cent of their portfolio in higher-risk assets, with 53 per cent going into low-risk (and low potential return) assets and 33 per cent going into medium-risk assets such as bonds.

Globally, only about one in five people plan to change their investment strategy by seeking advice, while a third of retail investors globally intend to invest the way they have done in previous years.

James Rainbow, Schroders' head of financial instutions and strategic accounts, says: '[The research] demonstrates a thirst for income but a worrying over-confidence amongst retail investors.'

However, some people have likely already increased their exposure to higher risk assets more than they might otherwise have done, in the hunt for income since the financial crisis.

As income-producing investments have become increasingly sought-after in recent years, investors have had to look further afield to progressively riskier asset classes to maintain previous levels of yield. This taking on of additional risk in an attempt to maintain income levels is referred to as the 'yield trap'.

Rainbow continues: 'Growth is returning, but it could be challenging for investors to achieve returns of 8-12 per cent while only placing 14-21 per cent of their investment portfolio in higher-risk assets.

'Whilst returning investor confidence should be celebrated, our survey shows that many investors are taking an unrealistic view on how their assets will perform in a market that is still dogged by the worst recession for a generation.'

If you are interested in pursuing income in the equity space, you might consider reading up on our latest investment trust 'dividend heroes'.


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