Setting realistic goals

Much has been said about the importance of planning your financial future. But after you have sought advice, planned, and invested your assets, there are further crucial aspects that will determine the achievement of your goals. Your expectations from your investments are a crucial factor that will determine your ongoing level of comfort with, and therefore your adherence to, your plan. The key is to set realistic expectations about market performance and the returns on your investments, towards which we offer you the following.

Stock market movements

The stock market tends to move up and down sharply, and exhibits a fair degree of volatility - sometimes in the course of a single day. At times, certain segments of the markets may perform exceedingly well while others may not. Although such an unstable market environment, and the possibility of higher than expected returns, may tempt you to assume risk beyond your tolerance, remember not to base your decisions on data about short-term performance. Timing the market.

It may also be tempting to avoid market declines by trying to "time the market", that is, moving your money out of stocks when you think their prices have peaked and may fall. This is generally a losing strategy, as your returns will be greatly reduced if you are not invested when the market goes up. History shows that buying and selling in an attempt to "time" the market typically produces much poorer results than simply staying in the market.

For example, although the compounded annualized return in the stock market since 1985 has been roughly 16%, many individual years in this period have seen losses. For example, in the twelve months ended December 31, 2000, the stock market lost nearly 21%. Such short-term deviations from long term averages present the real risk of "mis-timing". Always set your expectations based on a study of historic average returns of the market. If you set your expectations too high, your investment plan will not allow you to achieve your financial goals, as you will be unprepared for the downside.

The majority of the most dramatic market gains - as well as losses - occur over brief time periods that are impossible to predict. Even in a developed market such as the USA, an investor who stayed in the stock market during the entire 30-year period from 1963 through 1993 would have had an average annual return of nearly 12%. But, in an effort to time the market, if the investor missed the 90 days where the market gains were the highest in the period, the average return would have fallen to roughly 3% per year. But it is impossible to predict the 90 best days during a 30-year period. The short-term ups and downs of the market will be less worrisome if you keep in mind that you are investing to meet long-term goals.

Past performance

Investment advisors provide data about past performance so that you understand how an investment has behaved in different market conditions. Research about past performance should focus on how an investment compares to other investments with the same objective and to other relevant performance measures. Such research does not provide a tool to predict future results. Although history suggests that, over time, gains in the stock market exceed losses, you must be aware that there is no guarantee that this will continue in the future. Understand all the risks involved in making an investment, and evaluate them carefully, even if they appear improbable.

Goals versus risk tolerance

There is a wealth of information available on different investment avenues, but not viewing it in the right context is a potential risk in investing. It is important to remember that in addition to market-related factors, several aspects of your own investment behavior, including your expectations, goals, risk tolerance, and adherence to your plans and objectives, will determine the results that your financial plan will achieve. Setting realistic long term expectations for the performance of your investments is key to establishing and adhering to a successful investment plan.