Monday, 1 July 2013

Having Reasonable Expectations in Your Investing

Unreasonable expectations of how your portfolio should perform can lead to poor decisions, such as taking more risk to make up the difference  between your expectations and reality.

What is an unreasonable expectation?

1.  Expecting to gain 25 percent per year when the broader market is returning 8% is unreasonable.

2.  Expecting your portfolio to not fall when the market is down 35% is unreasonable.

3.  When investors fall behind in reaching financial goals, the temptation is to become more aggressive, which leads to unreasonable expectations.  If you choose more risky stocks (young technology companies, for example), you may have some winners that will help make up lost ground, but the odds are higher that you will simply fall farther behind.  The stock market and the economy don't care about your goals or investment choices.  They move due to a variety of actors and will go up or down with no regard to your plans.

What is a reasonable expectation of portfolio performance?

It depends.

1.  If your stocks are more heavily weighted toward growth, it is not unreasonable to expect to do better than an index of the broader market that is more heavily weighted toward growth.

2.  When the market is rising, your portfolio should also rise (and perhaps a little faster) and when the market falls, your portfolio should not drop as far or as fast.  That's the best you can hope for and if you hit, it, you are ahead of the game.

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