Why Keeping Your Expectations In Check Is So Important

My wife and I have started an annual “Financial Retreat”. This is where we take a small vacation to relax and discuss our financial goals for the upcoming year, five-years, 10-years, etc.

During our retreat, we cover a lot more than just “retirement planning”. We talk about our yearly budget, what vacations we would like to take (and earmark some savings for those occasions), any large purchases or events we might incur… We ensure we’re maxing out our IRAs, taking advantage of matching 401(k) contributions, maxing out our Health Savings Account (HSA), that we’re on track for how much we need to have saved for retirement… And of course how much we can stash away for those rainy days.

It’s great for us to get back on the same page and make sure we understand where we are, and where we need to go. But during the discussion of our retirement accounts, my wife caught me off guard…

You see, I manage our IRAs. And as you know, last year was a fantastic year in terms of market performance. After all, the S&P 500 rattled off a 29% gain. Many of her holdings performed even better during the year, up 31%, 46%, 50%, and 57% to name a few.

With her IRA, I employ a similar approach to what I talk about in Maximum Profit… let your winners run and cut your losers short. I thought I did a pretty good job with that in her portfolio this past year. I only had one loser, which I cut short for a 16% loss. All other closed positions were for a gain, and she has no losers in her portfolio currently.

I was excited to share these results with her. But my enthusiasm wasn’t met with equal zeal…

“That doesn’t seem like much… it seems like we should be making more…” was her response.

Dumbfounded, I assured her that a 20%-plus return in a year was indeed good.

Lofty Expectations Can Be Dangerous

This was a good reality check for me. I knew that if she “expected” these sorts of results and better, then she’s probably not the only one.

A recent survey found that Millennials expect to earn an average annual return of 13.7% from their investments. And they expect to earn these returns while being much more conservative than prior generations.

In other words, Millennials don’t want to risk their money. But they expect to earn double-digit returns.

These lofty expectations are likely due to the past decade, which has produced outsized returns. It’s also likely the culprit for why many investors have sky-high expectations for their investments.

But those expectations should be adjusted…

As you can see in the graph below, the compounded average return — including dividends — of the S&P 500 since 1871 is 9.2% (blue bar) — when adjusted for inflation the return falls to 7%. However, over the last 10 years — thanks to a raging bull market — that average return jumps more than four percentage points to 13.5%.

When trading — as with most things in life — it’s all about managing expectations. If you expect the market to rally 10%-20% every year, then I’ve got some bad news for you… you’re going to be disappointed.

Many folks begin their investing/trading careers with expectations of making easy money and striking it rich overnight. They expect to easily beat the market every year… win every trade. But the problem with this line of thinking is that they can’t admit when they’re wrong. They hold onto losers and often watch them swell into larger losses because if they sell at a loss it concedes defeat. They can’t handle the failure.

But as I’ve said many times before, selling a loser short is actually a win. It’s a win against a larger loss. You need to be okay with booking a loss once in a while. It’s going to happen. It’s part of the process. Just keep those losses small and you’ll be able to stay in the game — and build wealth — much longer and quicker.

Action To Take

As one of the all-time heavyweight champion boxers, Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.”

As we work our way through 2020, keep your emotions in check. Part of this is keeping your expectations in check as well. Instead of wondering if the market will deliver another 20%-plus year, focus on keeping the profits you earned in 2019. Focus on cutting losers short and letting winners run.

And if you’re looking for a No B.S. system that’s proven to deliver winning trades in any market, then you should check out this new report from my colleague Jim Fink. By using his tried-and-true system, you don’t have to worry about a market crash, the headlines, or anything else.

In fact, over the past 50 months Jim’s trades have racked up a win rate of 84.68%. If you want to get the details for Jim’s next trade sent straight to your inbox, simply go here right now.