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Managing Expectations for Your Portfolio Thumbnail

Managing Expectations for Your Portfolio

Coronavirus Financial Independence Investment Market Vizion

If you want to feel really good about something, I want you to go look at the equity portion of your portfolio.

You see, last week was the bottom of the stock market, and there's been this massive rise over the last 12 months. The 12 month performance for the equity portion of your portfolio looks off the charts. And I'm not just talking 12%, 14%, 16%. We're talking most of this stuff is 30%, 50%, sometimes 70% or 80%.

There's been a huge upside on the equity side of portfolios, depending on things like risk tolerance and diversification. You may have a variety of assets within your portfolio, but the equity performance has generally been stellar. The five-year performance, the S&P 500, they've been great. So yes, it's something to feel really good about today if you need something to feel good about.


Excited Investors and Unmet Expectations

Now, here's the crux – the curve ball. We are probably going to have the feeling of unmet expectations over the course of the next 6, 12, or 24 months. Honestly, this will really even continue into the next 5 to 10 years potentially because of this. Let's look at the data points.

  • The S&P 500 over the last 20 to 30 years on average has returned somewhere around 7 to 8%.
  • For the last five years, that number is around 13% on average.
  • For the last 12 months, it's in excess of 50%.

Understandably, there's this feeling that we're at this point in the market cycle where we feel like stocks should just go up forever. With all of the government stimulus and corporate earnings among other data points, we don't really see a near term, massive correction or crash coming.

The fact of the matter is, the market's not going to go up another 50% to 70% from here over the next 12 months, and we might find ourselves disappointed in an interesting way. Let me use an example.

When "Normal" Feels Slow: Stocks and Speed Limits

Let me first say that I know you would never do this, but for example's sake, let's just say I'm cruising down the highway going 80, and I see a white car parked over on the right. I might tap the brakes and go from 80mph to 60mph. All of a sudden, doesn't 60mph feel like you're going 40mph? When we're going fast and things slow down just a little bit, it feels like we're going so much slower.

I believe that's what's going to happen with our feelings with regard to the stock market. We're going to have these mental and emotional unmet expectations over the course of the next couple of years. In the bigger perspective, let's say the next five to 10 years, I'm even more concerned.

Last year started with that 40% pull back, but we've had not very much stopping this upward momentum of this market. It's been good in some ways, and has certainly made all of us feel richer, but if we go back to 2000 to 2010, the S&P performance was actually negative during that 10 year period. If we go from 2007 to 2017, that 10 year performance was positive, but not by a whole lot.

Expectation's Impact on the Retirement Red Zone

As a result, what I'm a little concerned about is that we all may have some big emotional expectations based on the near term performance of the market. If we do get some kind of a significant disruption like we did in 2000, 2008, or like we did last year over the next 10 years, we're going to have unmet expectations. And we're statistically bound to get one. 

This matters most if you are within a few years of planning to retire and are planning to walk away to be financially independent. You need to be factoring in lower rates of return, at least for those first 10 years of your retirement.

Preparing for Realistic Results

If you're working with us, we are already doing this in your portfolio. I'd be more than happy to talk specifics and how we're adapting that. 

If we haven't been introduced and this is causing you to, "Hey, hey, maybe I need to think about that," reach out to us. There's no obligation, you don't have to work with us. I'll be happy to talk through some of the systems and thought processes that you should be applying to your own planning as you're kind of coming into that red zone of if you're trying to retire over the course of the next few years.

I hope this is helpful for you. Here at Vizionary Wealth Management we're always here with perspective for the decisions ahead. Feel good about the performance, just be wary of unmet expectations. Have a great day.