How financial planners can help manage your expectations on the return on your investments

How financial planners can help manage your expectations on the return on your investments


Investing for the long haul necessitates constructing a well-diversified portfolio tailored to deliver appropriate risk and return levels across various market scenarios. However, even after meticulously designing the optimal portfolio, no one can accurately predict or control the actual returns the market will yield. It’s crucial to temper expectations, exercise caution and importantly not to expect too much overall return. No one can definitively determine a reasonable rate of return without a comprehensive understanding of your goals, risk tolerance, and current asset allocation.


Dispelling the 10% Myth

Historically, the phrase “the stock market has averaged 10% over its history” has been a pervasive mantra in the investment world. However, this assertion is a gross oversimplification and can potentially lead investors astray. A deeper analysis of the data reveals that the 10% figure is often derived from the US stock market and a simple arithmetic average of historical returns, which fails to account for multiple reasons:

  • The detrimental impact of volatility,

Relying solely on the arithmetic average can paint an overly optimistic picture, as it doesn’t accurately reflect the true growth rate of an investor’s portfolio.

  • Global stock market return,

Emerging markets have produced a higher annualised return than the US stock market!

  • Changes in risk tolerance throughout your life

People tend to lower their risk appetite towards retirement.

  • Inflation on wealth accumulation.

Historically, the long-term inflation rate in the U.S. has been around 3% per year. Failing to account for inflation effectively assumes that everything will cost the same in the future, which is a flawed assumption.


Realistic Expectations: Balancing Risk and Return

After considering the impacts of volatility and inflation, a more realistic historical estimate for an aggressive investor (primarily invested in stocks) would be around 7%, while a balanced portfolio of stocks and bonds might yield closer to 5%. It’s important to note that these historical returns are not necessarily indicative of future performance, as market conditions and economic factors are constantly evolving.


Personalising Investment Projections

Calculating projected investment returns is a complex process influenced by numerous factors, including investment time frame, risk profile, financial goals, and other assets.

Working with an independent financial advisor in Hong Kong can help you build a portfolio that accurately reflects your overall financial position and provides realistic return projections based on your actual investments.

This can be done in numerous ways however, the most common way is to build a lifetime cashflow projection. Read our article here which explains the benefits of a lifetime cashflow forecast.

Remember, projections are merely estimates, and there’s no guarantee that your investments will meet these expectations, even when carefully calculated.

It’s crucial to consider whether your investment plan aligns with your risk tolerance and time horizon. Generally, you shouldn’t invest if you can’t afford to ‘lose’ (paper loss) a significant proportion of your initial investment or if your time frame is less than five to ten years. Goal setting is really important and understanding your position with what you want to achieve in the short term and long term will need careful discussion with your financial advisor.


Scenario Planning: Stress-Testing Your Investments

Financial planning can help you evaluate how your wealth might be affected by different investment returns. For instance, if your investments are expected to deliver 7% annually, what would happen if they underperformed and delivered only 5% returns? This type of scenario planning can provide confidence in your investment decisions and peace of mind for other outcomes in the future while keeping your personal goals in mind.


Generational Divide: Experience vs. Optimism

According to one Global Investor Study (GIS) 2017, which polled 22,100 investors worldwide, millennials are the most positive for returns in the next five years. A significant portion of the participants (13%) expected an exceptionally high annual return of at least 20% on their entire investment portfolio.

Over the next five years, the study’s global average predicted an annualised return of 10.2%. Millennials were the most ambitious generation with an annualised return of 11.7%. Generation X expected 9.9%, Baby Boomers expect 8.7%, and those over 70 expect 8.1%.

The MSCI World Index 5-year annualised net return performance to 29th July 2022 was 8.81%. Very close to what the Baby Boomers expected.

This trend suggests that as investors gain experience, their expectations align more closely with reality.


The Role of a Fee-Based Financial Planner in Hong Kong

Working with a fee-based financial planner in Hong Kong can be invaluable in managing your investment return expectations. These professionals can help you:

1. Understand your Risk Profile: 

By assessing your risk tolerance, time horizon, and financial goals, a financial planner can help you determine an appropriate asset allocation that aligns with your expectations.

2. Diversify Your Portfolio: 

A well-diversified portfolio can help mitigate the impact of market volatility and potentially increase your chances of achieving your desired returns.

3. Conduct Regular Portfolio Reviews: 

Regular portfolio reviews and cash flow projections can ensure that your investments remain aligned with your goals and risk tolerance, and adjustments can be made as needed.

4. Provide Fiduciary Advice: 

Fee-based financial planners in Hong Kong are compensated based on their expertise and advice, rather than commissions from product sales, ensuring objective and unbiased guidance. Financial planners usually urge on the side of caution to avoid painting an unrealistic picture.

5. Protecting your portfolio from excessive emotional reactions 

Investing can be an emotional journey, and a financial planner can help you navigate market ups and downs without making impulsive decisions that could derail your long-term plans.