Expectation v. Reality
I recently came across this article, citing a survey that found:
Only 20% of advisors expect returns on investment of 10% or more per year. Investors are “generally very optimistic in contrast,” with 59% expecting returns of 10% or more, and 40% expecting returns of more than 25%.
I want to believe these numbers are wrong (I’d love to see a consensus number between 6 - 9% which would be closer to the market’s long-term average) but at least once per year I see something similar from any number of different sources. Last year, for example, this CNBC article cited a Natixis survey to make the case that wealthy investors expect to earn average annual returns of 17.5%.
There are two problems with unreasonably high return expectations.
I want to believe these numbers are wrong (I’d love to see a consensus number between 6 - 9% which would be closer to the market’s long-term average) but at least once per year I see something similar from any number of different sources. Last year, for example, this CNBC article cited a Natixis survey to make the case that wealthy investors expect to earn average annual returns of 17.5%.
There are two problems with unreasonably high return expectations.
Disappointment leads to bad decision making.
Disappointment is the difference between reality and expectation. When an investor sets an illogically high baseline, he sets himself up for exceedingly high levels of disappointment. This puts the investor on an emotional rollercoaster which in turn leads to very bad decision making - which is why the average investor consistently has terrible long-term returns.
Financial plans are only as good as their inputs.
Plans with unreasonably high return expectations are never going to work. Every so often I’ll meet someone looking to generate $30k / year of immediate retirement income from $250k in savings and that person is genuinely surprised when I tell them I can’t help.
Successful investing doesn’t require you achieve outsized returns or even beat an arbitrary benchmark like the S&P 500. It simply requires you consistently execute on a plan, and that plan is thoughtfully designed to accomplish your most important goals, regardless of what the future holds.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management and this is not intended to be personalized legal, accounting, or tax advice etc.
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