Submitted by Edward Jones Financial Advisor Kirk Doyle
In order to achieve your financial goals, you may need to invest in the financial markets your whole life. However, sometimes your investment expectations can differ from actual returns, which triggers a variety of emotions. So what are reasonable expectations for your investments?
Ideally, you hope that your investment portfolio will ultimately help you achieve your goals, both short-term and long-term. B. a holiday abroad, as well as the long-term, such. B. a comfortable retirement. However, your expectations may be affected by several factors, including the following:
- Misconceptions – Different factors in the economy and financial markets will trigger different reactions to different types of investments – so you should expect different results. In general, when you own stocks, you can expect greater price volatility in the short term. However, over time, the “up” and “down” years tend to even out. When you own bonds, you can expect less volatility than individual stocks, but that doesn’t mean bond prices never change. In general, when interest rates rise, you can expect the value of your existing lower-paying bonds to decrease, and when interest rates fall, the value of your bonds can increase.
- Recentness Bias – Investors exhibit “recentness bias” when they place too much emphasis on recent events in the financial markets and expect the same events to repeat themselves. But these expectations can lead to negative behavior. For example, the Dow Jones Industrial Average fell almost 6% in 2018 — investors who are sensitive to timeliness may have decided it’s best to stay away from the markets for a while. But the Dow was up more than 22% over the next year. Of course, the opposite can also be true: in 2021, the Dow was up nearly 19%, so investors who might have been sensitive to recency bias might have thought they were expecting more big gains right away – but in 2022, the Dow fell nearly 9% %. Here’s the bottom line: recency bias can cloud your expectations about how your investments will perform — and it’s virtually impossible to predict exactly what will happen to financial markets in any given year.
- Anchoring – Another type of investment behavior is known as “anchoring” – over-reliance on your original belief in an investment. For example, if you bought stock in a company that you thought had good prospects, you might want to hold on to your stock year after year, even if the company turns out to be facing real risks — bad management or its products, for example be outdated or be part of an industry that is in decline. But if you hold onto your initial belief that the company will inevitably do well, and you’re not open to new sources of information about that investment, your expectations may never be met.
In many areas of life, reality can deviate from our expectations – and this certainly also applies to our investments. When you understand the factors that can affect your expectations, you can be realistic about your investments.
This article was written by Edward Jones for use by your local Edward Jones financial advisor.
Edward Jones, Member SIPC
Kirk E. Doyle, AAMS®
www.edwardjones.com/kirk-doyle
Comments are closed.