Do Your Investments Align With Your Goals? Here is How You Can Set Realistic Investment Return Expectations

"The first rule of a happy married life is low expectations. That’s one you can easily arrange. If you have unrealistic expectations, you’re going to be miserable all your life. And I was good at having low expectations, and that helped me." - Charlie Munger

When the S&P 500 increased over 15% per year from 2019 - 2021, expectations for investors became too far fetched.

If you were employed at a tech company over the past decade, you have most likely enjoyed a healthy salary with a generous stock compensation package.

These stock compensation packages created ‘paper millionaires’, as employees benefited from their company’s stock increasing ten fold over a short period of time.

But many investors and employees resisted selling their stock positions as they thought the party would keep on going.

Group chats were blowing up with stock picks and even your uber driver was telling you ways to double your money.

Then 2022 happened, and those paper gains evaporated.

Group chats are now talking about layoffs and how you can get 5% on an 11-month CD…

Yes, we would all like to double our money overnight. But how many of us can watch our accounts get cut in half and not have an anxiety attack?

Money is a tool that helps you get what you want out of life.

However, when you don’t have a plan, you become much more reactionary with your investments.

We’ve had meetings with clients where they tell us they want to take on risk, invest 100% in stocks, and would be happy with an average long-term return of around 8%-10% per year.

But if you show them a hypothetical situation of their portfolio falling by 40% during a particular year, they almost fall out of there chair.

This is a classic example of a complete disconnect between expectations and reality.

We see it all the time when an investors portfolio holdings are completely inconsistent with their investment goals and expectations.

Having a reasonable expectation of what you can expect to generate for a return as a long-term investor is critical.

So, what type of investment returns should you expect?

This is a good gauge:

Stocks: Average compounded annual return 8% - 10%

Bonds: Average compounded annual return 2% - 4%

REITs/Investment Properties: Average compounded annual return 10% - 12%

Howard Marks wrote a great memo about risk in 2006 that included a great reminder:

“If you want to make more money, the answer is to take more risk.” But riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s simple: if riskier investments reliably produced higher returns, they wouldn’t be riskier!"

Your portfolio should be constructed with the intent to generate a return that will help you achieve your goals. This will help you to ignore external factors.

We must be realistic when it comes to investing.

Remembering just a few of these will help bring piece of mind during turmoil:

• Every 5-7 years, people forget that recessions occur every 5-7 years. (source)
• The S&P 500 index typically declines by more than 5% 3x per year, 10% declines occur about once per year, 15% declines once every three years, and 20%+ declines once every six years.
• Volatility is the price of admission.

Morgan Housel likes to say, “The fastest way to get rich is to go slow.”

Not sure if your investments align with the direction you are looking to go? Please reach out to me.

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing includes risks, including fluctuating prices and loss of principal.