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Writer's pictureCam Irvine

Expectations vs Reality- Part 2: Set Better Investment Expectations

For those that don't ever set better investment expectations for themselves, they make investing a whole lot harder.

It’s easy to have expectations about money that aren’t perfectly accurate. This happens with inheritances, debts, budgets, how much someone saves, costs for purchases, income, and just about everything else. But having misinformed expectations can have some unexpected affects on your finances.

 

This is all about how to have better investment expectations and how it can help you invest better.


If you haven’t seen part one about expectations vs reality, you can watch it here.

 

You might be thinking, “Cam, why does this matter and how does it relate to investing, at all?


The answer has 3 parts. They are:
  1. Investor’s often have expectations that are different from financial professionals

  2. This leads to disappointment but also poor investing behaviour, which in turn hurts returns even more

  3. Having better expectations allows to make your future more stable, because plans are not made using small chances, but real odds

 


Image of the investment return expectations and how financial professionals (advisers) are different from individual investors. Investors expect higher returns, which can lead to problems.
Visual Capital

Point 1: Advisers and individual investors do not have the same expectations.

Above is a chart from Visual Capitalist, using data from Natixis that asked 8500 individuals and 2700 finance advisers around their world what they thought share markets would return. Advisers expectations are the orange circles and individual investors are the blue.

Two things stick out as sometimes the gaps between advisers and individuals is large, with some individuals thinking they’ll get twice what advisers expect (like the US).


The other note is that in no country, do advisers expect to get a higher return than the individuals. This means people that don’t work in finance, often aren’t equipped with good information, so they think things will be better than what’s likely to happen. In Part 1, we showed how this results to disappointment, which leads to the 2nd point.



Point 2: Investor behaviour is the biggest factor in what returns a person receives.


We’ve talked about this in other videos, including “Chasing Returns” where people seem to often miss the good times and only invest when the party’s over.  This creates a vicious cycle that is very common:


An investor – let’s call this person Peter, invests money thinking he will earn 13% each and every year. In reality, Peter’s investment returns 7% per year on average, so what does Peter do after 3 years? He moves his investment to something else that has recently had higher returns, and once he does, the new investment that he switched to starts to experience worse performance.

He decides to wait it out for 3 more years, and after another disappointment, moves it again (see image right). This cycle keeps going, so that the average investor is constantly making decisions that hurt their investment portfolios returns. This is called “The Behaviour Gap”.

 



Point 3: Have better and more realistic expectations, because if you expect a lower return, you are less likely to disrupt your portfolio.

This is good news.


It also means that when you are planning for your future, you have a better baseline to build your projections on. If Peter thinks he’ll earn 13% on his $100,000 for the next 25 years, he would end up with $2.12 M, which would be awesome, but if he actually only earns more like 7%, his balance would be only $542,000 after 25 years. That’s a difference of more than $1.5M. It also means that if Peter has plans to have $542,000, then anything above that means he’ll be more than comfortable.


But, the opposite is not true. If Peter thinks he’ll have $2.12M and only has $542k, he’ll feel poor and likely have to make some serious life changes to accommodate this.

 

It’s easy to misinterpret this message and think it’s saying to just be fine settling for something that’s not as good. That’s not the case.  This is not saying, be happy with less money, it’s actually the opposite. Because often times investors all want the ‘best thing’ they aim too high with their expectations, but it’s exactly because they aim too high that they end up often under performing the easier and simpler option. Ironically, over zealous investors can be their own worst enemies, by creating their downfall, instead of their success.


So going back to Peter, if he aimed for 13% return per year, he’s more likely to get a 3% return per year, so instead of $2.12M or $542,000 he would probably end up with only $209,000.

 

One last note – be wary of investments, advisers, & financial offers that offer you unusually high returns. This is how investors often get duped into poor quality investments, and then how do they feel? You guessed it, more disappointment. If an adviser is giving you advice based on returns that are ‘higher than other options’, then they probably aren’t good adviser. Don’t get sold snake oil, instead buy some good information.

 


The Take Aways are:


  1. Have more reasonable expectations about your investments. Get an expert’s opinion, as in someone that knows what historical data is for different investments.

  2. When you have more reasonable expectations, it’s easier to plan your life, which has all kinds of other benefits.

  3. Switching your investment portfolio around constantly will do far more damage than leaving it be.

 

 


Our goal at Irvine Wenborn is to help people live better lives by improving their decision-making, and we do that through a financial lens.


If you want to better understand what kind of returns to expect for a portfolio, there are ways of calculating it rather simply. Reach out and we’d be happy to discuss our views with you, to help make some more informed decisions for yourself.


You can find us at our website, email, or on socials.


You can also share this video with anyone you’ve heard make a statement about some high returns they expect on their investments, and get their thoughts.

 

 

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