Could Hong Kong investors’ optimism be dangerous?

Schroders reported that investment returns are expected to average 11% annually.

Hong Kong investors have become more optimistic as they expect returns of their future investments to average more than 11% every year, Schroders Investment Management (Hong Kong) reported.

This is even as the pandemic continues to disrupt economies across the globe, which Schroders raised might be a concern.

“They are more likely to invest further, and to check up on their investments more frequently – but most striking of all they expect higher future returns,” the report read.

The Schroders Global Investor Study 2021 surveyed some 23,000 savers around the world, including 500 of them from Hong Kong.

Hong Kong investors’ prediction is higher compared to Schroders’ in-house economists forecast in January 2021 of 7.2% in annual long-term stock market return.

Moreover, whilst Hong Kong savers’ expectations on returns have been rising over the years, Schroders’ economists’ projections have declined in the past 12 months.

“The pandemic, the lockdowns, and all the associated disruptions might also have affected investors’ ability to process risk,” Stuart Podmore, behavioural investment insights specialist at Schroders, said, noting that the “expectations of future returns become less realistic.”

It was also observed that amongst those who have the highest expectations of future returns are those who identify as experts” or having “advanced” financial knowledge.

Some 24% of “expert” investors expect returns to exceed 25% annually in the next five years, whilst 17% of investors with advanced knowledge expect returns around 20% annually.

“What we may have here is an illustration of ‘hindsight bias’ and over-confidence,” Stuart said.

“Markets have been volatile in recent years, but overall returns have been unusually strong. Because the outcome has been good, in that investors’ portfolios have risen in value, it’s only human to make the assumption – incorrectly as it happens – that all your personal decisions have been good, too.”

Schroders noted with cognitive errors such as hindsight bias, Hong Kong investors run the risk of losing sight of long-term goals and plans.