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UK investors expect annual returns of 8.1 per cent over the next five years, according to a major new global study.

The finding, part of the Schroders Global Investor Study 2018, marked a notable fall from an expectation of 8.7 per cent in the UK in last year’s study.

The returns, based on the average expectation of 1,000 UK investors, include growth in their money as well as any income paid out in the form of dividends and interest from a variety of investments including cash, bonds, property funds and shares.

The global study measured the views of more than 22,000 investors in 30 countries. Hopes for investment returns were more moderate in the UK than for any of the regional averages.

Returns expectations were highest in Asia, at 11.8 per cent. In the Americas, investors expected 10.2 per cent and the figure was lowest in Europe at 8.6 per cent.

The responses follow a particularly strong spell for equities and they echo returns achieved by global stock markets in the past five years. The MSCI World Index, for instance, has returned 12.2 per cent a year since 2013. However, it’s worth noting that over the same period the UK MSCI Index returned 6.8 per cent a year.

The historic performance of markets does not offer a guide to future returns.

A full list of countries and their average expected annual investment returns over the next five years, compared to returns – just for stock markets – over the last five years can be found below.

Average annual expected five-year returns versus actual MSCI index five-year average annual returns

Source: Schroders Global Investor Study 2018. Thomson Reuters Datastream data correct as at 3 October 2018. Five-year MSCI Index returns between 01 Oct 2013 and 01 Oct 2018 are based in the local currency.

We have focused on equities because of the higher risk and potentially higher returns. Doing so underlines the level of optimism among investors, given their expectations are based on a portfolio of mixed investments and savings, which may deliver lower returns. The average investor, globally, holds 33 per cent in equities, 18 per cent in bonds, 25 per cent in cash, 12 per cent in property funds and 11 per cent in alternative investments.

‘Expert’ investors expect even higher returns

The study also drilled down into how expectations vary by levels of experience and knowledge.

UK Investors who judged their level of investment knowledge to be “advanced/expert” expect returns of 7.2 per cent a year over the next five years.

Those who consider their level of investment knowledge as beginner expect a slightly more modest 7 per cent “Intermediate” investors expect 6.8 per cent.

Investors' expected annual returns based on investment knowledge

Source: Schroders Global Investor Study 2018.

How age affects expectations

Younger generations had bolder expectations for their investments than older generations.

UK millennials, defined in this study as those aged between 18 and 36, believed they would get an annual return of 8.6 per cent over the next five years.

The expectations stepped down with each generation: Generation X (age 37 to 50) expected 8.3 per cent; Baby Boomers (age 51 to 70) expected 7.8 per cent; those aged 71 and over were expecting annual returns of 6.1 per cent.

Claire Walsh, Personal Finance Director at Schroders, said: “The difference in forecasts may, in part, be explained by attitudes to risk. Younger investors tend to have a longer timeframe ahead of them, which means they might have more of their money invested in high-risk, high return assets. In contrast, those nearing retirement or who are already retired, may prefer to hold lower-risk, lower return investments. They are far more sensitive to sudden falls in the value of their investments.

“It should also be noted that many millennials were young when the financial crisis occurred. In the decade since, we’ve had such a long run of growth it isn’t surprising that younger investors are so optimistic about future investment performance.”

The study supports this view, highlighting a clear correlation between age and risk. Among investors globally who identify themselves as “expert”, the trend was very clear. The 18-24 age group hold on average 27 per cent of their portfolio in high-risk investments. This percentage consistently decreases with each subsequent age group, bottoming out at just 20 per cent for ‘expert/advanced’ investors over 65.

How much of their portfolio do ‘expert/advanced’ investors put in high-risk investments?

Source: Schroders Global Investor Study 2018.

What do analysts predict for future returns?

Returns are notoriously difficult to predict but Schroders Multi-Asset investment team forecasts suggest a 5.6% return for global equites over the next 10 years.

Forecasts, of course, should not be relied on for financial planning. In fact, the high return expectations may raise concerns among financial planners. The study also showed that the top reason for saving was to have a comfortable life during retirement. Those plans could unravel if returns are lower than expected.

• For the global picture read: Investors forecast returns of 9.9 per cent

Income expectations

Investors were also surveyed about their attitude to income. When asked the level of income they would like to achieve, rather than what they expected, the average answer in the UK was 8.6 per cent compared with 10.1 per cent globally.

This related only to interest and dividends paid out by investments, not increases in value, and excluded cash savings or property. [Read the full story]

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.

For more visit the Schroders Global Investor Study home page

Important information

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Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

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