The Importance of Managing Expectations in Investing

Having high expectations can be a powerful tool for success in the world of investing. One of my favorite stories, and one I’ve shared here before, is the classic psychology experiment involving the “Pygmalion effect.” In this study, the group of gifted students performed much better than average–simply because the expectations of their teachers caused them to work harder. In the same way, when we have certain expectations of ourselves, it can inspire us towards taking the actions necessary to achieve success. It is often the expectations we have in investing that enable us to begin investing in the first place. Expectations move us; they motivate us to take action we wouldn’t otherwise take.

While expectations are absolutely necessary to be a successful investor, those expectations also need to be managed. As there is such a thing as being too pessimistic, or having expectations that are too low, we can also be too optimistic and allow our expectations to become inflated. In this article, I would like to discuss how dialing it down a little and having more reasonable expectations of success can make you a more prudent and much better off investor in the long run.

When your expectations are too high, you may begin to fall victim to thinking you can beat the market. No investor, no matter how seasoned or how well-studied, can know so much as to beat the market. If we begin to think that we can accurately forecast fluctuations in stock prices and routinely pick winning stocks, we are deluding ourselves. If we think too highly of our financial savvy, though, it may just take one lucky guess for us to start thinking we’re unstoppable—we think we’re on a roll. If we don’t temper our expectations with sound thinking, we may let ourselves get carried away and end up losing everything we’ve gained.

Pride can be dangerous. Success can get to our heads. If we don’t manage our expectations, we’ll start thinking that we can engage in more risks than we really should. There is, of course, such a thing as being too afraid of risk. But, when our unrealistically high expectations blind us to our vulnerabilities, the much greater danger is not taking risk seriously enough. Thus, managing our expectations can help us as investors develop a more realistic and fruitful portfolio, constructed with the appropriate levels of risk and reward.

Like everything else in life, managing expectation in investing is all about balance. Your expectations can be too low, and they can also be too high. The key is to have expectations that are high enough to motivate you toward action, but not so high that you lose your reason. Do not expect to predict stock prices and movements, or pick winning stocks and beat the market. But do expect to achieve close-to-market returns over time. Stability in wealth is built slowly-but-surely and little by little. Great investors know that they must keep their expectations in check in order to develop the patience necessary to achieve long term goals. If you need any help understanding how to balance those expectations, please feel free to reach out to us for a free consultation. We want to help you develop the right balance of risk and reward that helps you achieve your greatest dreams and reach your highest goals.