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One of the stock markets experiencing the widest gap between expectation and reality is… Hong Kong. It’s only eclipsed by Spain in the difference between what investment professionals say is a realistic above-inflation annual return, and what investors believe they can make. That’s according to a fascinating study conducted recently by Natixis Investment Managers which surveyed 15 stock markets around the globe.
Hang Seng hangover?
As a group, the Hong Kong stock investors polled by Natixis feel they can hit an annual return of 11.2% above the level of inflation. The gaggle of financial professionals tapped for the same opinion begged to differ; they felt a realistic level is 4.9% above inflation. The difference between the two is a whopping 129%. Here’s how the Hong Kong numbers compared to other markets around the globe:
|Market||Investor expected return||Professional expected return||Difference|
Source: Table compiled with data from Natixis Investment Managers
To be fair, we can’t necessarily blame Hong Kong investors for being so bullish. Across 2017, which was generally a fine year for stocks worldwide, the Hang Seng index rose by almost 30%.
That was well above the nearly 20% of the S&P 500 index in the U.S., not to mention Asian peers the Shanghai Composite (6.6%) and Japan’s Nikkei (19%). In such a bullish atmosphere, especially when compared to other markets, it can seem that everyone is making bank from their stock investments. If a basket of popular stocks has gained almost 30%, why shouldn’t we get a double-digit return from the equities we’re buying?
What is a realistic stock market return?
It’s critical for investors to set reasonable expectations. We shouldn’t, say, put money in government securities expecting to double our money within a few years. With stock markets, all of us have heard the war stories of investors who put a handful of money on an unknown company, and grew rich as that enterprise became highly profitable.
Although the total returns for stocks beat nearly every other asset class over time, they’re not a get-rich-quick scheme.
One key reason why is that stock markets are volatile over the short term, and it can be tough to know when a bull market will end. In one year, a bourse’s main index might increase 30%, the next year it could dip by 5%. Many factors influence the rise and fall of individual stocks, and markets as a whole. However, if held for a reasonable amount of time the average stock investment will likely make money; the average annual return for equities, depending on market and time period, is anywhere from 7% to 11% — well above that of many other popular financial assets available to the public.
The turtle beats the hare
Of course, outsized returns do happen; at bullish times, they can happen with encouraging regularity. But stock investing is more frequently a matter of “slow and steady wins the race,” since the more successful investors tend to devote time to identifying solid companies and an appropriate price at which to buy them. Patience in this game is rewarded; even in fast-paced Hong Kong you shouldn’t approach it as a quick round of gambling. It’s far better to use a deliberate process of research, evaluation and analysis.
We’re not saying it’s wrong to be optimistic about the equities you’ve got your eye on investing. We’re just cautioning that you can’t expect to become a millionaire overnight, no matter what market(s) you put your money in. That said, there is plenty of money to be made in Hong Kong, New York, Madrid, or nearly anywhere else with a vibrant stock market if you’re willing to put the time and effort into making it. So go forth, and happy investing!
Want to know more about the Hong Kong market?
There are lots of myths that could stop us from being successful investors. In Hong Kong, we might have the impression that people generally get rich by buying property. But is real estate the best-performing asset class?
We’ve recently published a Special FREE Report on the Hong Kong Market: The 4 Rules for Winning in the Stock Market: A Foolish Guide for Hong Kong Investors.
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Disclosure: Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.