Investing in the 1990s was fun, wasn’t it? All those double-digit gains in the stock market, year after year, were certainly nice. But they weren’t typical — and that’s important to remember as you invest today.
Unfortunately, some investors may still be burdened with unrealistic expectations, thanks to the “go-go” decade that’s now gone. That’s too bad, because if you always expect returns of 16 percent a year, you’ll never be satisfied with the 7 percent or 8 percent that have historically been more normal.
So, how do you avoid playing the “Great Expectations” game? Here are a few suggestions:
• Set goals, not targets. You can easily get frustrated by setting “targets” for the rate of return you want from your investments. On the other hand, you do need to set long-term financial goals for yourself. You may decide you want to retire at age 55, pay for your children’s college education or buy a vacation home in 10 years. Once you’ve established these goals, you can then estimate how much money you’ll need to pay for them. At that point, you can determine the appropriate investment strategy for accumulating the money you’re going to need. By establishing realistic goals and creating a systematic strategy for achieving them, you’ll be more likely to overlook short-term price fluctuations and stay focused on the long-term objective.
• Hold on to high-quality stocks. By expecting a very high level of return each year from your stocks, you’re setting yourself up for disappointment — and you’ll also be more likely to make some bad investment decisions. Here’s how: If you’re dissatisfied with your stocks’ performance, you may end up constantly juggling your portfolio in an effort to boost your returns. This type of hyperactive trading is usually ineffective — and it can be expensive, too, once you start racking up heavy commissions. So, instead of perpetually buying and selling stocks in an effort to increase your return, look for high-quality stocks, and hold them for the long term. Most good stocks will still have their ups and downs, but if they represent good companies with good products and strong management, they should reward you over time.
• Diversify your investments. If you expect high returns from your stocks, you’re going to be rewarded in some years and disappointed in others. It’s true that, over time, stocks have historically outperformed other asset classes, such as bonds and U.S. Treasury securities. And yet, during any given year, stocks can perform poorly, while bonds and Treasuries are showing good returns. That’s why it’s essential that you diversify your investment dollars among a broad range of assets — growth stocks, international stocks, growth-and-income stocks, bonds, Treasuries, certificates of deposit, etc. By diversifying your portfolio, you can help cushion yourself against downturns affecting just one type of asset — while giving yourself more opportunities to succeed.
In most walks of life, it’s good to be optimistic. And it’s that way in the investment world, too — as long as you temper your optimism with a healthy dose of realism.