A big mistake investors make is expecting more than what’s possible in the time allowed. In other words, they expect too much or too little in too short a time. The internet boom was built on this. The housing bubble was too.
But this condition isn’t specific to bubbles. Rather, two bubbles in 10 years raised our expectation of asset bubbles. Now we’re constantly looking for bubbles.
Which gets me to my point.
Our expectations get clouded by recent events, the wrong history, general advice, and biased views. Just look at the past few years. The extreme views led investors astray, were totally inaccurate, and fell far short of reality. Yet, people invested on those misguided expectations.
If you make investing decisions based on what’s possible but unlikely, it won’t be pretty. Unlikely expectations are made. Poor decisions follow. Disappointment and frustration set in. And your reaction compounds the mistake.
Let me explain.
- We expect market crashes to never recover.
- We expect rising markets to never stop.
In both cases investors tend to under or over estimate returns respectively, based on recent history. Crashes drive people away from stocks while rising markets suck people in. In both cases, the expected returns tend to be very wrong, but are used to make financial decisions anyway. Decisions like how to invest or how much to save are based on an unlikely outcome.
But that’s just the start.
We expect the future to be exactly like the past.
We expect lower risk and higher returns at any valuation.
We expect _______ political party will ruin the economy.
We expect dividend stocks to be safer than other stocks.
We expect bonds to be safer still.
We expect bonds to earn 8%, because it’s the average since 1980.
We expect interest rates will stay low forever.
We expect the stock bull market to run at the current pace.
We expect a stock market crash any day now.
We expect a better time to buy.
We expect to act differently next time.
We expect to spot the next crisis.
We expect to be greedy when others are fearful or however the saying goes.
We expect to stick to our new long-term view.
We expect to know more than the next person on things we know little about.
We expect one quarter’s results to make all the difference.
We expect the pundit in the media knows more about us and our money than we do.
We expect to ignore the headlines.
We expect to break even on that fallen stock…before we sell.
We expect the next stock pick to be our lottery ticket.
We expect homes are great long term investments…again.
We expect the future to be worse than today.
We expect returns will cover a savings shortfall.
We expect above average returns without putting in above average time.
The question rarely asked is – What if I’m wrong?
You should be ready for any possibility, from the best to the worst case, not just the one you expect. Managing expectations prepares you when things don’t work out the way you want. Simply, if you’re not expecting other outcomes, you won’t know how to act when it happens.
If you can’t do that, then lower your expectations. It’s the best defense to a bad outcome. You’ll be less disappointed and make less poor decisions due to the results.
