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Keeping Expectations Realistic
How do investors establish realistic expectations for investments and not lose sight of them during volatile markets?
If you've been investing for years and witnessed many highs and lows in the market, you probably have more realistic expectations about your investments. But some investors, especially those new to investing, may have expectations that are too high or too low.
Learning from market history
While past performance doesn't guarantee future results, looking at market history can help you develop realistic expectations about your investments.
As the chart below shows, the best year posted by the S&P 500 Index since 1984 was a 38% return in 1995. The worst year's return was a negative 37% in 2008. Would it be realistic to expect either of these returns year after year?
Realistic Expectations Accept
Varying Annual Returns
S&P 500 Index 1984-2008
Source: S&P Micropal, 12/31/08. Illustration shows performance of the S&P 500 Index, assuming all earnings reinvested, starting on 1/1/84. This index is unmanaged and unavailable for direct investment. Chart reflects past results and does not predict future results, nor does it represent or predict the performance of any Franklin Templeton fund.
Single-year extremes are to be expected, but it's not realistic to expect them to continually repeat themselves over the long haul. A more realistic outlook would be to focus on the average annual return and not get carried away by the highs or the lows.
Keep fear and greed in check
The danger of being swept away by unrealistic expectations is rooted in two common human emotions: fear and greed.
Fear. If the market declines and stories in the media take on a gloom-and-doom feel, fear of losing money may tempt you to change your long-term plan.
Greed. Likewise, when the market is flying high and everyone seems to be getting rich overnight, greed can tempt you to take on too much risk in pursuit of higher returns.
Investment decisions driven by fear or greed are rarely part of a wise strategy in the long run.
Don't let hype cloud your perspective
The temptation to follow the crowd may be great. But most investors are better off sticking to a plan based on their personal financial goals and ability to handle risk.
A financial advisor can help you define your investment goals and create a sound strategy for meeting them. With this plan in place, realistic expectations based on a historical perspective can be a comfort when the world around you is up in arms about how high or low the market is on any given day.
Create a plan and stick to it
The temptation to follow the crowd may be great. But most investors are better off sticking to a plan based on their personal financial goals and ability to handle risk.
A financial advisor can help you define your investment goals and create a sound strategy for meeting them. With this plan in place, realistic expectations based on a historical perspective can be a comfort when the world around you is up in arms about how high or low the market is on any given day.
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