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-  By Mike Fortunato, CIM®, FCSI®

Everyone intuitively understands that investing for the future is a good idea, but when it comes to setting realistic investment expectations, people’s intuitions vary wildly. An investor’s expectations are key axioms which form the foundation for a solid financial plan. When expectations are overly optimistic, the stage is set for a future disappointment, and conversely, when expectations are overly pessimistic a goal may appear out of reach, and not worth pursuing. A good advisor should know what is realistic when it comes to potential future risks & rewards. And a great advisor is able to explain why certain expectations are or are not realistic rather than simply telling the investor to trust them. Only when both the advisor’s and investor’s expectations are aligned are they able to move forward with a strong financial plan. That is why one of the most important jobs an advisor has is setting realistic investment expectations for their client. Although this sounds simple and straight forward, in practice, this is one of the most challenging role an advisor has.

Every week I help investors formulate and execute financial plans to reach their goals, and in my experience, the majority of clients I work with come to me with unrealistic investment expectations. More often than not, clients are not willing to change their expectations without some debate. Here are some examples of unrealistic investment expectations:

  • “I want my investments to grow a lot, but I don’t want to risk losing anything.”
  • “I want a safe investment, but it has to return over 10%.”
  • “I want to see 10% return every year, year after year.”
  • “I’m willing to invest for aggressive growth, but if it doesn’t materialize in a short amount of time I will pull the plug.”

It is obvious why investors cling to these expectations, after all, if they actually believe these scenarios are possible, why would they want to settle for less. Here are some examples to illustrate my point - which would you choose:

Scenario 1) Eating magic ice cream, that gives you rock-hard, six-pack abs, or eating broccoli and exercising for two hours each day?
And
Scenario 2) Driving to work each morning in a magic car at 200 Km/h on the 401 Highway, at rush hour, or sitting in traffic on the 401 Highway at rush hour?

If it were possible, I think most people would pick the first choice in both scenarios; the problem is that magic ice cream and magic cars don’t exist in the real world. Most people can easily see how unrealistic these scenarios are, however, most investors I work with have trouble seeing the same flaws in the examples of unrealistic investment expectations I mentioned above. This can be a real challenge for advisors as they are essentially trying to convince their clients to choose between what appears to be a riskier and inferior investment plan, over a safer and superior investment plan. Simply telling the client one choice isn’t real often doesn’t settle the debate, in fact, in my experience it can make things worse. After all, these clients already believe the magic low-risk, high-reward investment exists, so when you tell them it doesn’t exist, they actually question your expertise as an advisor. This is why you can’t simply tell the client they are wrong, instead, great advisors take time to educate their clients about the concepts of risk and reward. Once a client is empowered with this knowledge, they often revise their own expectations to be more realistic.

In the next instalment of this article I will examine what I believe are some of the major causes of unrealistic investment expectations…