Earlier this year Natixis Global Asset Management surveyed 300 Canadian investors with a minimum of $258,000 in investable assets about their expectations when it comes to annual returns. It found that the average investor needs to achieve 9.3% above inflation on annual basis to meet their long-term retirement goals. Tack on 2% for inflation, and we’re talking about 11.3% per year.

In July, Natixis surveyed 150 Canadian financial advisors about their expected annual returns for clients; advisors felt 4.8% above inflation was more realistic.

Can you say “delusional”?

Investors of all stripes are kidding themselves if they think they can generate double-digit returns over the long haul without taking above-average risk.

Consider that the iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) has earned 7.8% annually over the past five years. That’s before inflation, so the real return for the TSX proxy was more like 5.8%—350 basis points fewer than investor expectations.

So, in order to meet these lofty retirement needs, investors will most likely have to go beyond passive investing in index funds to seek out stocks and other, more actively managed investments that will meet their expectations.

There’s a big problem with this approach. Do you know what it is?

When chasing jumbo-sized performance, the exact opposite tends to happen, leading to underperformance rather than the mediocre returns of the XIC. The net result: you’ve pushed yourself further from your retirement goals, not closer.

With the help of Morningstar, I took a look at the 50 largest stocks in Canada by market cap. Royal Bank of Canada (TSX:RY)(NYSE:RY) is the largest of the 50 at $122.6 billion, and Intact Financial Corporation (TSX:IFC) is the smallest at $12.6 billion.

Of those 50 stocks, 29 had five-year annual returns of 11.3% or greater, meeting investor expectations, while 21 were unable to bring the goods over the same period.

The top 50 stocks by market cap: top five performers

Company 5-Year Annual Return
Constellation Software Inc. 

(TSX:CSU)

52.6%
Alimentation Couche-Tard Inc. (TSX:ATD.B) 48.2%
Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) 29.9%
CGI Group Inc.

(TSX:GIB.A)(NYSE:GIB)

26.3%
Magna International Inc. 

(TSX:MG)(NYSE:MGA)

24.9%

Source: Morningstar

It’s possible that an individual investor exists somewhere in Canada whose entire portfolio over the past five years consisted of these five stocks—$10,000 invested in 2011 would be worth $47,000 today—but the odds of this are pretty high, I would think. But you have to like those returns.

The problem with doing this is that you’ve ratcheted up the company risk without the guarantee of jumbo-sized returns. If all five tank at the same time, your losses would be significant. Whereas in the XIC, they represent just 5.3% of the overall portfolio. Of course, with less risk comes less reward.

Research suggests that households who’ve used a financial advisor for +15 years have, on average, 2.7 times the financial assets of households who’ve never used an advisor over the same time frame.

I’m not stating this in order to promote the use of financial advisors, but when financial professionals are expecting returns half that of individual investors in this country, you can’t help but think Canadian investors are completely out to lunch.

Readjust your expectations—before it’s too late.

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Fool contributor Will Ashworth has no position in any stocks mentioned. Alimentation Couche Tard, CGI Group, Intact Financial, and Magna International are recommendations of Stock Advisor Canada.