7 Ways to Manage Your Investing Expectations

7 Ways to Manage Your Investing Expectations

Wealth Management

Have your investment results been generally expected, better than expected or worse than expected? Chances are the answer depends on how realistic your expectations were in the first place. If they’re unrealistic from the outset, you’re bound to feel disappointment and concern over your portfolio outcomes. This is not an uncommon experience for people who get caught up in the chaos of the Investors’ Dilemma, but with the right mindset, you can manage your expectations much more effectively.

Ultimately, understanding the relationship between expectations and results is essential to achieving true investing peace of mind. So let’s explore seven ways to address the potential breakdowns that happen when you set your expectations that typically cause investors to make poor decisions.


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1.Recognize and Retract Hindsight Bias

As investors, we may tell ourselves that we knew all along what was going to happen. Hindsight bias focuses on past events, luring us into believing that we had it all figured out. This particular phenomenon is dangerous because it sets up unrealistic expectations for the future.

Learning the outcome of an event can make it easy to convince ourselves that we could have accurately predicted the result before the fact. We begin to think that we knew in advance whether a specific strategy would succeed or fail. But hindsight – not foresight – is 20/20.

When you find yourself saying, “I knew that was going to happen,” you’re falling into a hindsight bias than can set you up for disappointment later on. The fact is none of us can predict future outcomes with any level of certainty. Only in hindsight does it become crystal clear. After all, if you had really known what was going to happen, you would have taken different actions to procure better results.

2. Abandon False Patterning

It can be difficult for investors to accept the reality of randomness in the market. When we desire so intently to know what’s going to happen, we can fall into a false sense of assurance that past performance fits into a mold for forecasting future results. In essence, we make the mistake of

identifying patterns where none exist.

Unfortunately, no one (including you or the media gurus!) can predict the future, even with some very convincing explanations of performance clusters and streaks. Free markets work because they are not predetermined, and attempting to deduce future outcomes based on false patterns is detrimental to long-term portfolio success. It can tempt you to make poor investment decisions with disheartening outcomes.

3. Remember: Emotion-Based Decisions Are Your Enemy

We often have an inclination to base important life decisions on our emotions or “gut” feelings. But when it comes to investing, emotion-based decisions can be destructive. You might think you’re making investment decisions based on logic, but they are frequently driven by emotions like trust, loyalty, hope, greed and fear.

Yes, emotions are an important element of our humanity, and they are impossible to ignore. However, it’s crucial to be aware of how emotions are dictating your actions and negatively impacting investment results over the long run. They can cause investors to break basic investment principles and undercut portfolio performance.

When you disregard a prudent investing strategy in favor of behaviors prompted by emotions, you’re unlikely to capture the rate of return you expect. Compounded over a period of years, this effect significantly inhibits your potential to reach financial goals, and it can foster frustrations and fears that cycle into more and more emotion-based decisions.

4. Ignore the Financial Media Hype

There’s no shortage of hot, new investing tips in the news these days, and many of us are highly vulnerable to sailing straight into the media frenzy fed to us all day, every day. What we tend to lose sight of is the fact that the financial media is designed to “sell” products and ideas, not to help us make investing decisions that are right for our personal situation.

As the news circuit churns out a seemingly endless barrage of attention-seeking stories, it’s difficult to decipher fact from fiction. And even when the headlines are true, they typically break AFTER most industry experts already know the information (and have closed the window of opportunity). Plus, any truth inherent in these stories is unlikely to be useful without considerable context. Of course, there is some valuable information in the noise of the media, but how much of it is pertinent to your investment goals and long-term plan?

Genuine, thorough financial analysis that promotes real investment success is a product of collecting data from multiple independent sources, not designing or rebalancing a portfolio based on hot tips from the media. When you make decisions based on a prudent and well-researched investment plan, you’re empowered to ignore the rumors, predictions, stories and quick tips circulated by the media.

5. Keep Your Confidence in Check

As investors, we are prone to overrate our own ability to beat the market. Overconfidence, or an undeserved sense of certainly, ability or skill, is a common pitfall in the investment world.

The Dalbar study, conducted by a leading financial services research firm, focuses on investor behavior and indicates that most investors do not beat the market. The study’s most significant finding is that regardless of how well any particular investment may perform, the average investor is unlikely to realize the same return. In other words, an investor’s performance does not equal the investment’s performance.

When left to our own devices, we will most likely underperform the market, consistently selling stocks that, over the long term, do better than the ones we are buying. It’s important to remind yourself that very few investors beat the market.

6. Get Real About Necessary Lie Syndrome

Necessary lie syndrome is a tendency to justify imprudent behavior. Consider how you may have been fooling yourself in this way. Think of a time when you’ve lied to yourself just before doing something unhealthy, self-destructive or dysfunctional. Are you practicing the same mentality with investing?

To attain real success with your portfolio over a period of time, it’s important to be able to identify this habit within yourself and get honest about how it could hinder your results. The remedy to necessary lies is brutal honesty. If you ever hope to set and achieve realistic expectations in your investment journey, you must be willing to admit the necessary lies you tell yourself along the way.

7. Take Personal Inclinations Out of the Picture

The recommendations outlined above are intended to help you approach your investing efforts with a more sound and less fractured frame of mind. But make no mistake: Overcoming these common breakdowns is no easy feat. That’s why one of the most fundamental ways to manage your expectations is to seek the support of a competent financial advisor, one who has invested and managed money through countless scenarios.

The education, knowledge and experience of a qualified financial advisor provides the context needed to analyze what information is relevant to your goals and what is not. An investment advisor and financial coach helps educate you on what your investments are doing and why, so you can stay on track and stick to your plan instead of veering off course and risking your long-term goals. More important, a professional can separate your emotions, biases and unrealistic expectations from the process and clarify the best decisions to yield fruitful results.

To learn more about managing your investment expectations to achieve true peace of mind, access your free copy of the Investor Awareness Guide.

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About Greg Hammond, CFP®, CPA

Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.