Why Realistic Expectations May Be Great Expectations

A survey of investors found that many have reduced their expectations for the stock market. A large majority expect annual stock market returns over the next one to five years to be no higher than 8%.1 This is down from the 12% return investors expected from stocks in 2010 and the 20% return they expected in 2009.2

Despite scaling back their investment expectations, 87% of investors still expect to reach their long-term financial goals, even though four in 10 made no adjustments to their investment strategies during the previous two years.3

Positive thinking can be a powerful force, but there’s a fine line between optimism and unrealistic expectations.

Possible Pitfalls

The most obvious risk of overestimating how your portfolio will perform is that you may not reach your goal on time. Major financial goals such as retirement and saving for college can take years to achieve. If you arrive at the expected date of your goal but haven’t accumulated the expected funds, there’s no starting over. You may be forced to postpone your goal or make do with less money.

A less obvious risk is that, as you get closer to your target date and it appears as though you may not achieve your goal, you may be tempted to take on more risk than would be suitable for your situation in order to help close the shortfall.

Unrealistic expectations can also create a false sense of retirement security by leading you either to contribute too little of your income during your working years or to withdraw too much during retirement.

A small difference in investment performance can have a tremendous effect over a long period. If you were expecting a 5% average annual return but actually earned 8%, you’d probably be pleasantly surprised. Imagine your disappointment if you were expecting the higher return but actually earned less. Investments seeking to achieve higher rates of return also involve a higher degree of risk.

It’s natural to hope for the best. But being realistic — and not overly optimistic — may put you in a better posi

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tion to pursue your financial goals.

1, 3) Investment Advisor, July 15, 2010
2) CNBC.com, December 21, 2009; December 31, 2008

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Investment Services professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Monday, March 21, 2011