What should I expect from my investments?

The beauty of investing is that it lets you earn passive income – money you haven’t had to work for. However, a 2021 survey of investors by fund manager Natixis shows a significant disconnect between investors’ expectations of returns, and what they are likely to earn.

According to the study, Australians expect to earn returns of 14.4% annually on their investments. That’s a pretty tall order. When finance professionals were asked their expectations of returns, the average was 6.0% annually, indicating a 140% gap in expectations between investors and professionals.

Chasing outsized returns is fine as long as you are prepared to withstand higher levels of risk. And this is where the crunch can come.

Natixis found six out of ten investors say they are comfortable taking risks in order to get ahead. But our mettle can be sorely tested during periods of market turbulence, which is what we are seeing on sharemarkets at present. If you can weather periods of volatility, the rewards can be there for long term investors.

As a guide, over the last 10 years, average returns on savings accounts – a very low risk investment, have ranged from a high of 5% in mid-2012 to 0.75% at present. You won’t lose sleep at night worrying about money held in bank deposits. However, these sorts of returns are unlikely to see your wealth forge ahead any time soon.

At the higher end of the scale, over the past 10 years Australian shares have delivered average total returns (dividends plus capital growth) of 9.17% annually. It hasn’t been a smooth journey though – it never is. Over the last year, Aussie shares have tumbled by 9.1%.

This is why shares need to be seen as a long term investment. It takes time for equities to recover from market falls. That said, many listed companies continue to pay dividends to shareholders even during market downturns, so they can still be a source of regular, tax-friendly income.

The key to juggling our appetite for high returns with a level of risk we are comfortable with, is to diversify across different investments. Exactly how you diversify can depend on your life stage and personal goals. What matters is that you have clear expectations about how an investment can perform over time.

It is easy to be rattled by falls in investment markets – and it’s never much fun seeing an investment drop in value. But if you realise upfront that volatility tends to go hand in hand with investments that have a proven track record of high returns, it becomes easier to resist the urge to bail out when markets take a bath in the red.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.