You're likely being wildly unrealistic about how much money stocks can make

By Mark Hulbert

Here's a key lesson for Financial Literacy month: Be real and study market history

Individual investors are out of touch with reality, and too often so are financial advisers. According to a 2023 survey of thousands of investors in 23 countries, individuals on average expect the stock market to beat inflation by 12.8% annualized over the long term. That's more than double the 5.1% inflation-adjusted return that is the actual return of global equities from 1900 through 2023, according to the UBS Global Investment Returns Yearbook 2024.

To put these differences in a long-term context, consider that $100,000 growing at a 12.8% annualized rate becomes $1.1 million after 20 years. At a 5.1% annualized rate, in contrast, that $100,000 grows to $270,000.

The average financial adviser is only half as unrealistic as the typical individual. According to Natixis, the firm that conducted the survey, the average adviser expects global stocks to outperform inflation over the long term by 9% annualized - 3.9 annualized percentage points better than the historical average.

These topics are worth reviewing anytime, but especially now since April is Financial Literacy Month. Unrealistic expectations probably sabotage more financial plans than any other form of illiteracy. When investors fail to earn anything close to their unrealistically high expectations, they tend to double down, incurring more risk, and inevitably end up lagging the market by even more.

The chart above reproduces some of the findings from the Natixis survey, along with the long-term returns of various countries' stock markets on an inflation-adjusted basis. The average financial planner is most unrealistic in Singapore, where there is an 8.7 annualized percentage-point spread between expected equity return and the historical average. The country in which the average planner is most realistic, in contrast, is Australia, where there is a spread of just 0.2 annualized percentage points, on average.

U.S.-based financial planners are in second place, on average, just behind Australia. The spread between their average expectation and historical reality is 0.5 annualized percentage points.

Even the historical average may be too optimistic

The analysis up to this point may still be too optimistic. That's because it is based on the assumption that the historical average is a realistic expectation of future returns. But there are compelling reasons to believe that the future may not live up to that average.

That's because the U.S. benchmark S&P 500 Index SPX is currently extremely overvalued, according to virtually all valuation measures that have a statistically significant historical record.

You can see this in the chart above, which shows the S&P 500's annualized 10-year real total return that is the implicit forecast of each of eight valuation indicators. On average, these eight are projecting that the S&P 500's total return over the next decade will lag inflation by 2.9% annualized. (To calculate each indicator's implicit forecast of 10-year equity returns, I constructed a model based on the historical correlation between its past readings and the stock market's subsequent-decade returns.)

The bottom line: Perhaps the most useful step you can take toward greater financial literacy is to study history. Financial advisers have a particular responsibility to rein in the inflated expectations of their clients.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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04-09-24 1301ET

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