Get Real

Setting Appropriate ExpectationsInvestors are consistently bombarded with catchy adjectives used to describe financial products that are currently performing well.  This is what many critics call “investment noise.”  Some even take it as far as calling it sensationalism.  Whatever you call it, it is the mumbo jumbo that confuses the everyday investor and sets expectations that can rarely be met.

Unfortunately, it is the investors who lose because they believe the sensationalism.  Investors read the hype and become reactive – they suddenly want to invest in the top-performing fund or ETF of the year – rather than being proactive and taking time to look deeper into the foundation of the fund and the track record of the portfolio manager.  One of the best ways to help your clients restrain from falling prey to the sexy headline predators is to have a plan that generates a balanced portfolio and a realistic outlook.

The first step to developing this plan and setting appropriate expectations is to take stock of your client:  Who are they?  With what risk level are they comfortable?  What are their personal and financial goals?  When determining their goals, have them be very specific.  Ask them to quantify their goals – for example, “I want a 10% rate of return and I want minimal risk.”  If their goals are not quantified, it is like chasing a moving target, easily rationalized when missed, not to mention frustrating and disappointing.  For example, a recent study by the survey firm Dalbar, Inc. found that from 1990 through 2009, the S&P index returned 8.20% annually, but the average stock investor only made 3.17%, barely keeping up with inflation.

So what causes the disparity? Too often decisions are based on greed and fear – the classic buy high, sell low scenario. By making investment decisions based on the “noise” that appears in many forms in the investing world has more than likely contributed to this behavior.

Conversely, “Those investments earmarked for a specific purpose are viewed by shareholders as less dispensable,” said Louis Harvey, President of Dalbar.  An investment that an investor doesn’t have earmarked for a particular end, however, is generally moved around more often, causing performance to suffer.  “The key is to help investors establish specific investment goals as well as define realistic return expectations,” Harvey said.

Creating a well-diversified portfolio, designed with the clients’ goals in mind, is one of the best ways to prepare for uncertainties in the markets.  For short-term goals, a more conservative mix may be appropriate.  If the portfolio is earmarked for retirement in 20 years, then the client may be able to accept more risk, in the form of more aggressive investments, to hopefully earn a higher rate of return.

What is as important as having their portfolio well balanced is having client expectations in check as well.  Not only will it help them feel more comfortable with the choices you have made together, but it will make the inevitable market volatility a little easier to swallow.

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