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What Did You Expect?

I was speaking with my friend Lisa the other day.  She was upset that she had not gotten a better return on her investments in 2017.  “Apple [stock] was up over 40%,” she complained, “but I only got 13%.”  Ironically, this was the very same person who was panicking in 2009 about the 25% loss she had incurred in 2008.

It’s natural to focus on missed opportunities during periods when the capital markets are providing generous returns.  And it’s just as natural to ruminate over losses during periods of declines.  The media refers to these emotions with the not-so-charitable but quite descriptive nouns “greed” and “fear.”  Is it helpful to let these emotions drive your investment strategy?

The fact is, when it comes to investments, at any point in time you could have gotten more or could have lost less. In January 2017 an investment in Apple stock would have netted you a 48% return one year later.  But what if you had made such an investment just two years earlier, in the middle of February 2015?  You would have been facing a 26% loss the following February.  What a difference a couple of years makes!

Why did Lisa only get 13% in 2017 with the stock market performing so well? Because her investment portfolio was well-diversified. And rightly so.  Think back to the beginning of 2017. The U.S. stock market was facing a significant number of challenges: ultra-high historical stock price valuations, increasing inflation, Federal Reserve interest rate hikes, extreme political uncertainty. Whatever your concerns, having an investment portfolio diversified across many different assets – each of which is likely to perform differently depending on so many unknown economic and political outcomes – balances out the risks and helps keep your investment growth steady. That’s what prudent investing is all about.  I would worry a lot more about someone who had gotten a 48% return in 2017 than about someone with a 13% return.

At what point do your expectations become irrational? Here are just a few examples:

  • When you put half your entire savings in Bitcoin solely because it’s up over 10 times for the year.
  • When you refuse to invest in stocks because you lost half your savings in 2008.
  • When you expect to get high returns in good years but at the same time expect to avoid big losses during bad ones.

Ex-Oakland Raiders coach John Madden once said that after his team had lost a game, he’d spend most of his post-game time in the locker room talking about what everyone did well. And after a win, he’d focus on all the things they’d done poorly. His view of a coach’s role is to help his players keep their emotions – both the negative ones as well as the overconfidently positive ones – in balance. That’s exactly what a good financial planner should do for his or her clients.  Lisa appears to be doing just fine on her own, except perhaps in managing her expectations. For many people like Lisa that can be harder than managing their money. But it can be even more rewarding!



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