Investors' Portfolio Return Expectations Are Too High

investing.com:

A stunning post from VisualCapitalist showed a poll of 8550 investors and 2700 advisors and the gap between the two of future portfolio return expectations. The poll was global; however, I will focus on this post’s domestic portfolio return expectations.

Note the gap between investors’ and advisors’ portfolio return expectations in the U.S. is the widest of any country.

However, as we will discuss, that gap is unsurprising given the outsized returns relative to long-term historical portfolio returns since the “Financial Crisis.”

However, here is the most apparent problem with which advisors are more correctly aligned. It is a true statement that over the very long term, stocks have returned roughly 6% from capital appreciation and 4% from dividends on a nominal basis.

However, since inflation has averaged approximately 2.3% over the same period, real returns are closer to 8% annually.

That is shown with the red dashed line in the S&P 500 chart below. The chart shows the average annual inflation-adjusted total returns (dividends included) since 1928.

I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University.

The chart shows that from 1928 to 2023, the market returned 8.45% after inflation. However, after the financial crisis in 2008, returns jumped by nearly four percentage points for the various periods.

After over a decade, many investors have become complacent in expecting elevated portfolio returns from the financial markets. However, can those expectations continue to be met in the future?

We must understand what drove those returns to gauge whether future portfolio return rates can replicate the past.

Over the long term, there is an apparent relationship between