Set Realistic Expectations and Stay the Course

WHEN we allocate our savings it’s important to have realistic expectations of future returns that are grounded in historical data, but also a sound understanding of why certain assets generate certain types of returns. Remember, the financial markets are not where you get rich. Your real “investments” in life are made in your own skills and the skills of others. This is where you are most likely to get rich. Your savings portfolio is there to generate growth and stability based on your financial needs and your financial plan. It can certainly make you richer, but it’s not the engine of your wealth creation.

Thinking your portfolio will do more than it realistically can is a fast track to frustration and poor results. For example, investors often hear that the stock market returns 10% annually and assume they can hit that target by picking stocks and going all-in on an aggressive allocation. The problem is, those returns are an average over long time horizons – and they ignore the huge impact of fees, taxes, and volatility.

Reality is that the stock market can go through sustained periods of negative or low returns, and the returns you eat are the real, real returns net of inflation, taxes, and fees. As a result, your actual returns from a stock allocation will not only be highly uneven over time, but they will be lower on average than the headline figure we often hear about in the financial media.

Worse, you will read a million articles in your life about how you could have turned $10,000 into $1,000,000 in a few years by picking XYZ stock. Remember the Agony and Ecstasy data – all of these articles are eye-ball-chasing cherry picking. These types of narratives will skew your perspective and warp your expectations. Ignore them.

John Bogle used to always tell investors to “stay the course” and avoid the urge to tinker with your portfolio and succumb to short-term behavioral biases. Having realistic expectations is an important piece of the process to ensure you aren’t constantly chasing returns and strategies. The grass will always look greener somewhere else, but rather than trying to live on someone else’s lawn you need to spend more time nurturing your own and not abandon it every time it starts to look a little brown.

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Okay, now that we’ve covered the basic principles, let’s start looking at our potential suitors.