Overview – Knowing the Limits of Your Investment Expectations
Almost all investors have some sort of expectations in mind, some of which they explicitly state, and others that are in the back of their minds.
Perhaps an investor expects to achieve a certain portfolio value in the next few years, start investing in international real estate in the near future, or vastly improve their knowledge on certain topics, such as risk management and options trading.
If used properly, investment expectations have the potential to motivate investors to reach new heights they previously thought were unattainable.
While setting high investment expectations can certainly be beneficial, it’s very easy for investors to get ahead of themselves and set the bar way too high, which may only set them up for disappointment and subsequently lead to a sharp decrease in motivation.
There’s nothing wrong with setting high expectations as an investor, but there’s a difference between setting ambitious expectations and setting ones that are well beyond their current capabilities.
High vs. Unrealistic Investment Expectations – Knowing the Difference
Imagine you’re a new investor, and your portfolio’s market value currently sits at $500. Rapid growth is quite easy to achieve in the early days of a portfolio – injecting more funds or sudden, significant capital appreciation can quickly increase a small portfolio’s value.
In this scenario, expecting your portfolio to double in value within the next year is well within the bounds of possibility.
However, as time goes on and a portfolio continues to grow, it becomes increasingly harder to dramatically increase its value in a short time. Doubling a portfolio comprised entirely of equities from $500 to $1,000 in under a year is relatively easy to do, but trying to double a $500 million portfolio comprised of several asset classes in the same time frame is much harder to do given the increased level of complexity that comes with such a large, diverse portfolio.
Countless factors such as volatility, unexpected market events, and portfolio reshuffling all have the potential to affect portfolio value. Therefore, expecting to see your portfolio double in value every year for, say, the next 10 years is quite a bold expectation to set for yourself, and starts to border on the limits of reality and wishful thinking.
The line that separates high investment expectations from preposterous ones is that high investment expectations still reside within the realm of what’s realistic. What counts as “realistic” depends on several factors, some of which are within an investor’s locus of control and others that are well beyond it.
For example, if an investor knows it takes them, on average, about three days to fully go through an annual report in detail, then they can’t possibly expect to go through five annual reports in a week without experiencing a dramatic decrease in the quality of their work.
Virtually every stock’s price fluctuates on a daily basis: some days it increases, on others, it decreases – every investor understands this is par for the course in financial markets. So, unless something dramatic were to happen, such as a sudden, positive news announcement or a sudden speculative surge, it’s very unrealistic for an investor to expect one of the stocks they own to drastically increase in price in just a few days.
Setting high investment expectations is fine, but the moment these expectations start to push the boundary of what you can control or what your experience has shown before, you start your descent on the slippery slope of disappointment. Trying to control things you have no chance of controlling will only end poorly for you, no matter how much you kick and scream.
However, remember that high expectations are those that fall within the realm of your current reality. Put another way, just because you’re unable to do something today doesn’t mean you’ll stay that way forever.
Investors evolve and grow all the time, meaning expectations that seem ludicrous today may not seem so farfetched tomorrow. It all depends on what an investor’s current abilities are.
Setting Investment Expectations Starts With Understanding Your Abilities
Imagine you’ve been going on daily, morning runs for the past month.
You’re confident in the progress you’ve made with your endurance, and you can easily do a 5km run without much issue. Given your progress, expecting to be able to run 10km, or even 15km, without any breaks within the next couple of months is certainly a high target, but is something that’s still within the realm of possibility.
But what if you’re an extremely ambitious person, and after just one month of daily running you plan to do a marathon sometime in the near future? Marathons are 42 km in length and test a runner’s endurance, pacing, and mental strength. Runners who are serious about doing a marathon typically spend months preparing for the big event.
Wanting to run a marathon so soon despite having only a month of running experience is clearly beyond your current running capabilities. If experienced runners spend months preparing for one, then your chances of successfully completing one (that is, without being forced to retire or sustaining major injuries) with only a month to prepare are essentially nil.
Before setting any investment expectations for yourself, it’s important to understand where you currently stand in terms of your skills, experience, and other competencies. Knowing what exactly you’re capable of doing right now will directly influence what constitutes as high or unrealistic expectations.
There are countless investors around the world, all with varying degrees of experience, knowledge, and expertise. Therefore, expectations that seem high for one investor may seem completely unachievable for another, and vice versa.
Because investors have the ability to improve themselves, this also means that the types of expectations they set can gradually become more ambitious because their skills and experience can now accommodate them.
Back to our example from earlier, it may currently take a certain investor three days to thoroughly go through an annual report, but if they learn how to read faster and develop a framework to go through certain sections more efficiently, then they might be able to trim that time down to just two days. Now, reading multiple reports in a week doesn’t seem so ridiculous anymore.
It’s very difficult, if not impossible, to expect something from yourself if you don’t even know what it is you’re currently capable of doing and what exactly your limits currently are.
Expectations Push You to Your Absolute Limits, Not Exceed Them
When it comes to race car driving, a skill every driver should possess is knowing how to get the most performance out of the car they’re using.
Whether it’s Formula One, IndyCar, the World Endurance Championship, or the World Rally Championship, the reality every driver must accept is that performance between cars is unequal. Some cars may prove to be very dominant, while others may prove to be less-than-stellar.
Regardless of what sort of car they end up with, a skilled driver knows how to extract every last drop of performance out of it to ensure they can still perform reasonably well.
Although many drivers are able to do this effectively, at the end of the day they’re still limited by the car they’re working with. If their car has less downforce, less power, and is harder to control, then even the most skilled driver can only extract so much performance out of it until they reach its limit.
Expectations work the same way.
Whether we like to admit it or not, we all have our limits. We can only expect so much from ourselves until we hit our personal ceilings. Setting high investment expectations serves the purpose of pushing investors to make the absolute most of their abilities, not magically exceed them.
Are investors capable of improving themselves, thereby gradually raising their limits in the process? Absolutely.
However, as you probably know from your own life, improvement is a slow and gradual process, meaning your limits will slowly grow as well.
Try as much as you want, but you can’t possibly hope to meet your ridiculously high expectations if you don’t have the necessary level of skill needed to achieve them in the first place.
Understand what your limits as an investor are, and set your expectations such that they push you as close to those limits as possible.
The Dangers of Setting Unrealistic Investment Expectations
Have you ever been left disappointed by someone or something because you expected something to happen, only for that expectation not to be met? Or have you ever felt disappointed because you expected so much from yourself only to come up short in the end?
Investors run the same risk when they set unbelievably high investment expectations for themselves yet still come up short in the end.
Investment expectations are a double-edged sword: they have the potential to motivate you to reach new heights and to make the most of your abilities, or they can quickly drain whatever motivation you have after revealing the current inadequacies in your skills and knowledge.
You could be the most mentally tough person in the world, but you can’t expect to keep moving forward as an investor if you lack the intrinsic drive to do so.
Not only do unrealistic expectations quickly rob investors of their motivation, but they can make investors do some very reckless things that could potentially jeopardize their entire portfolio in an attempt to try and reach these unrealistic expectations.
Earlier we talked about how it becomes much harder to significantly grow your portfolio the larger it becomes, so, expecting to double your portfolio’s value every year eventually becomes an unrealistic expectation.
But what if an investor decides to ignore this reality, and instead is hell-bent on trying to double their portfolio every year no matter what? The likely outcome is that this investor will quickly become a speculator instead and take on prodigious amounts of investment risk as they attempt to meet this expectation.
Who knows, they may be able to succeed for a short while, but because they’ve taken on so much investment risk their portfolio has now become a house of cards: all it takes is for one card to fall, then the rest will quickly follow suit.
Whenever an investor tries to chase after something they clearly have no chance of achieving, they’ll be left disappointed at best, or with a decimated portfolio at worst.
Setting unrealistic investment expectations always ends poorly, so an investor is better off sparing themselves from the inevitable disaster by learning to set aside their pride and set expectations that are still within the realm of what they believe is possible.
Wrapping Up
Investors set all sorts of expectations for themselves, some of which are very modest, and others that are very ambitious.
While setting investment expectations can help investors reach new heights they previously thought were unattainable, it’s important to make the distinction between ambitious investment expectations and those that are truly beyond reach.
At the end of the day, ambitious investment expectations are ones that can still be achievable – a lot of time and effort may need to be spent to try and reach them, but ultimately they are still within the realm of possibility.
On the other hand, unrealistic expectations are those that far exceed the capabilities of an investor or are well beyond the realm of what’s possible. Sure, an investor can improve themselves to increase their limits, but this is a process that takes time and patience and isn’t something that can be dramatically accelerated through sheer willpower.
Every investor has their limits, and the sooner they discover what those are, the sooner they can understand what sort of expectations they can set for themselves, and which ones they currently cannot.
Sure, an investor is free to set unrealistic expectations if they want, but it won’t end well for them, regardless of how things ultimately turn out.
