The Magic of Low Expectations

Friday, January 25th, 2019

By: Kevin Shuller, CFA®

“I find my life is a lot easier the lower I keep my expectations.” – Bill Watterson

Most investors expect too much. Those who know the least expect the most. A Natixis survey shows that individual investors in the US expect 10% returns. Professionals expect much, much less.

Is 10% a logical assumption? 10%/year is the long-term return on the S&P 500. When most people think about investments, they think stocks. Investments = Stocks = Up 10%/year. Seems logical, right?

Wrong. This embeds several assumptions that you shouldn’t be comfortable with. It assumes a portfolio is 100% stocks. It assumes stocks will return 10% through the end of your investment horizon. It assumes you will hold through the inevitable corrections.

Weathering corrections is far easier said than done. The annual DALBAR study shows that from 1997-2017, the average equity fund investor returned 5.3% per year. The S&P 500 returned 7.2%. Individual investors are far more likely to underperform the S&P 500 over time because they buy at tops and sell and bottoms.

Advisors surveyed by Natixis think clients should expect 6.4% returns. Pension managers expect 6.5-7.5% and struggle to meet that. Pension fund managers have access to top-tier managers and asset classes that individuals don’t. They have many built-in advantages and still struggle to meet their target. If those who understand investing the best are expecting 6-7%, expecting 10% is a recipe for disappointment.  

Setting reasonable expectations will make you happier and (probably) wealthier. Your nest egg comprises money saved and money grown. If you expect 10% returns, your money won’t grow fast enough. If you expect 10% returns, you won’t save enough. If you expect 10% returns, you are likely to take too much risk to achieve that goal. If you expect 10% returns, you are begging to be disappointed year after year. Don’t do that to yourself. Take your lead from the investment professionals. Expect less.