NCPA - National Center for Policy Analysis

Some Investors Have Unrealistic Expectations

May 1, 2001

While investors apparently agree with experts that the stock market will rebound, many have unrealistic expectations regarding long-term stock gains, warn experts. One reason is that many new investors don't realize that the annual double-digit gains of the past few years are the exception rather than the rule.

That's according to studies on investor confidence and expectations financed by the Institute of Psychology and Markets to be published in the institute's Journal of Psychology and Financial Markets. Based on a survey of investors conducted one month ago and analyzed by Stephen Johnson, president of Northwest Survey & Data Services in Eugene, Ore., and other surveys completed in March:

  • The average American investor still expects double-digit future annual gains.
  • About one American in five, in fact, expects stock investments to gain more than 20 percent in a normal year, almost the same number that held that kind of expectation three years ago.
  • Four out of 10 thought their stocks should gain 10 percent to 20 percent a year for the next decade.

However, the historic average for stock returns, not controlled for inflation but including reinvested dividends, is 9 percent to 11 percent, according to research by Jeremy Siegel, of the University of Pennsylvania's Wharton School in Philadelphia, and by Ibbotson Associates of Chicago.

That is as much as 40 percent less than current expectations.

Source: E.S. Browning, "'Normal' Stock Return Lies in Eye of Beholder," Wall Street Journal, April 30, 2001.

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