By Paul J. Lim
October 18, 2017

There’s a saying on Wall Street: Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. In other words: It’s only after real greed sets in, and investors come to expect sky-high returns, that market rallies peter out.

If that’s case, this aging bull market may be headed for trouble.

A new survey released this week by Fidelity Investments shows that wealthy young millionaires have staggeringly high expectations for market returns for the coming year. Millionaires who are either millennials (roughly 20 to 36 years old) or Gen X (37 to 52) expect their investment portfolios to return 16.4% next year, according to Fidelity’s 2017 Millionaire Outlook Study.

To put that in perspective, that’s double the historic average annual return for a 60% stock/40% bond portfolio since 1926. What’s more, that’s nine percentage points higher than what older millionaires (specifically, baby boomers) expect to gain next year.

What’s going on?

You might blame it on a phenomenon called recency bias. That’s a behavioral finance term: It means that human beings tend to assume that the way things have been in the recent past is the way things will continue to be in the foreseeable future.

Of course, when it comes to stocks, that’s never the case.

“You have to consider the recent experience of these millennial millionaires,” says Ronald Roge, a financial planner in Bohemia, N.Y. “Their returns in the market have been good for the past few years, and because they’re millionaires at such a young age, they probably had an experience where they made quite a bit of money quickly, maybe in setting up a business.”

So they expect similar results going forward, he says.

Older millionaires, by contrast, have the experience of having invested during the financial crisis and the tech wreck—not to mention the Asian currency crisis and 1980s stagflation—to ground their expectations.

What’s interesting—and potentially frightening—is that the expectations of millennial millionaires are for a total portfolio, which includes not just stocks, but also bonds and alternative assets. For a balanced portfolio to gain 16.4% next year, stocks would likely have to return around 20% or more.

Yet even in this eight and a half year old bull market—the second longest rally in market history—stocks have never come close to returning that much over a sustained period. In reality, stocks have delivered compounded annual growth of 12.6% since the start of 2009, according to Fidelity—well above historical averages, to be sure, but short of millennials’ future expectations.

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So there must be something else at work here. And the big fear is that investors have gone beyond being simply optimistic and are now euphoric.

The worry is that if investors start to demand returns that are significantly higher than the markets can deliver, they will start chasing those gains by taking on more and more risk in their portfolios—and that, eventually, that type of risk taking will catch up with them. Then, once they start suffering actual losses, those investors are likely to recoil and start unwinding their risky bets, which could in turn drive the broader market down, affecting all investors.

“You have to experience both the ups and downs of the market to really understand,” says Roge.

Unfortunately, he adds, “the market has a knack for teaching investors lessons.”

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