What is a realistic return to expect from your investments?

Many investors expect annual returns of around 9% - but the way they are investing could make those goals difficult to achieve, according to new research from Fidelity International.

Fidelity’s latest Be Invested Global Study, which surveyed more than 13,000 investors across Europe and Asia Pacific, found UK investors have some of the highest return expectations, hoping to achieve annual returns of 9.2% over the next five years.

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Yet many are holding large sums in cash. On average, 42% of investable assets are kept in cash, while cash accounts for almost 17% of the typical investment portfolio.

Over long periods, cash can drag on portfolio growth because returns often struggle to keep pace with inflation. Holding too much cash could therefore make it significantly harder for investors to reach their long-term goals.

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Fidelity’s analysis suggests investors holding very high levels of cash could fall more than 40% short of their goals over the long term.

Someone investing £10,000 and achieving annual returns of 9.2% would end up with around £24,112 after 10 years. After adjusting for inflation, assumed at 2.8%¹, the real value falls to £18,249.

However, Fidelity’s Capital Market Assumptions (CMA), which estimate how different assets may perform over the long term, suggest returns could be significantly lower for investors holding high levels of cash.

For example, a portfolio invested entirely in cash is projected to grow to just £10,616 in real terms over 10 years. That’s around £7,500 (or 40%) less than the average investor’s hoped-for return.

Even investors splitting their portfolio equally between cash and global equities may still fall well short of their target returns. Their real return after 10 years is projected to be £12,677 - more than £5,500 short of their aspiration.

A traditional “balanced” portfolio of 60% global equities and 40% bonds is projected to grow to around £14,100 in real terms - still more than £4,000 below investors’ aspirations. Even a fully invested global equity portfolio could still miss investors’ targets by around £3,000.

Cash erodes returns on £10,000 over 10 years and widens "aspiration-action gap"

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.