Photo from the movie “Elf” (2003), courtesy of New Line Cinema

When you were a child, did you ever set your hopes on receiving a certain gift during the holiday season? Perhaps it was a bicycle, a trainset, a pogo stick or an action figure or doll. Do you remember your anticipation and desire building as the year grew shorter and Christmas or Hanukkah grew closer? Imagining having that toy in your hands and playing with it until your mom told you it was time for dinner? Well, what happened if you never actually received that special gift? How did it feel? Were you disappointed, angry?

We’re bringing this up because you may have expectations for the performance of your portfolio. They may be based on what you experienced in the past, when the stock market performed really well. You may also be influenced by what you’ve heard from friends, family or coworkers about some amazing return they earned on their investments. When investors don’t receive what they expect, they can be disappointed and angry. Just like the kid who doesn’t get what she or he wants during the holidays.

The problem, then, is having expectations that aren’t met. That is a recipe for negative emotions – and no one like to feel those. So, let’s talk about expectations. What should you expect as a return on your portfolio?

Let’s assume that you have a moderately risky portfolio. We’ll assume that half your portfolio is invested in stocks, and half in bonds. We’ll call this a “50/50” portfolio. Let’s also assume that the stocks are evenly split between US and international stocks.

How do we set expectations for the performance of this portfolio? Well, one way would be to look to the past. How did this portfolio perform during a long (but relatively recent) period of time? Well, for the period 1970-2018, our 50/50 portfolio earned 7.05%. A rather nice return over a nearly 50-year time period.

Should we expect a 7% return over the next 50 years? There’s no way to know that. But probably not. There are lots of reasons why our 50/50 portfolio will probably earn a return that’s lower than it did over the past five decades. Very briefly, bonds are likely to earn less, because interest rates are so low. Stocks will probably earn less, because they are relatively expensive in historical terms.

So, what can we expect from this 50/50 portfolio? When were at an industry conference in San Diego a few weeks ago, a representative from Charles Schwab suggested that this 50/50 portfolio would earn about 5.5% a year over the next 10 years. That’s obviously quite a bit less than the historical return of just over 7%. At Springwater, our projected return for a 50/50 portfolio is similarly just over 5%.

So, as an investor you may need to adjust your expectations, and accept that returns will very likely be less than they have been historically. You should also remember that returns aren’t static – they can vary dramatically from year to year, even as their average is 5%. Markets are volatile. It’s entirely possible that there will be years in which portfolio returns are negative – even those for a moderately risky portfolio like our 50/50 example. Too, there may be years in which returns are far greater than 5%.

By setting your investing expectations appropriately, you’ll avoid disappointments and frustration.

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