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Investing: Expectations vs. Reality

Posted by Brad Bridgewater on Jun 26, 2017 4:56:54 PM
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investingA quick Google search of the phrase “Dow Jones Industrial Average history” yields endless versions of one of the most iconic, and misleading, graphs in modern finance.

With a few dips here and there, including the most pronounced one during the Great Depression, the stock market trend shows a steep incline that encompasses more than a century of data.

When financial markets are doing well, it is easy to forget that, “Past performance is no guarantee of future results.” For decades, the overall upward trend of the market has created certain expectations for performance. These expectations, notably the idea that the market “always goes up,” are actually counter to the realities of financial markets and harmful to long-term financial plans and investment goals.

Expectations and Reality

Here are several common expectations paired with their much more likely realities, and ideas for ways to approach potential problems with a good financial plan.

Expectation: The stock market always goes up.

Reality: Stocks can be extremely volatile in the short term, which can be particularly damaging around the time you retire.

As we mentioned earlier, the performance graph of the Dow Jones Industrial Average can be very misleading. It’s true that the overall trend of the DJIA is overwhelmingly positive over its 121-year history, but there are many underlying reasons why that is the case.

Over the past eighty years, there have been eleven significant bear markets lasting anywhere from two months to almost three years. The most recent, from October 2007 to March 2009, was caused in large part by the mortgage crisis and the burst of the housing bubble. Following these pronounced losses, the market rebounded with near double-digit gains.

Expectation: The stock market will generate annual returns of eight to ten percent.

Reality: The key phrase is: “Past results are no guarantee of future performance.” Stock market returns vary greatly depending on a variety of factors.

There are many things that contribute to down markets, and most of them cannot be anticipated by average investors. The best way to combat steep market losses is to craft a plan that is unique to your circumstances and have the fortitude to stick with it, even in the face of short-term volatility.

Expectation: Investment management is straight-forward and easy.

Reality: Financial markets are complex and influenced by both outside and internal factors.

Knowing and understanding the countless details of financial markets requires attention to everything from exchange rates and trade agreements to oil prices and monetary policy. Investment management is a specialty comprised of experts in disciplines that include investments, taxation, company and governmental benefits, and retirement savings vehicles, among many others.

Speak to an Advisor

A good financial plan requires a delicate balance between investments, retirement goals, and time frame, but to be truly effective, your plan should also include a variety of other factors such as insurance considerations, tax considerations, retirement benefits, estate planning, budgeting, and generational planning, just to name a few.

A skilled advisor can help you navigate the differences between your own expectations and the realities of investing and financial planning, and build a sustainable plan that will help you reach your savings goals without keeping you awake at night.

To start building your financial plan, request a consultation with an advisor today.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning