Managing Expectations

At the beginning of my client relationships, we talk a lot about expectations. Like a marriage, the relationship only works if both parties understand what to expect from one another.

What I expect of the clients – to keep me informed, to help me help them make rational decisions, to review their account statements or to meet with me on a somewhat regular basis to discuss planning topics – and what the clients expect of me – regular communications, monitoring the portfolio for rebalancing, proactive planning topics, working closely with their other professional relationships and on-going education – are at the forefront of the relationship. And those things are good; they make for stronger long-term relationships.
Then, there is a second conversation about expectations, one that is likely more important than how often clients will receive portfolio reports and emails from me. It’s what we can expect from the markets. Nothing can wreck a reasonable investment philosophy quicker than saying, “I didn’t know this could happen”. If you’re a long-term buy and hold investor, who is surprised that the market can fall 30% or more, you’re in trouble. If you’re a trend follower, who is surprised that you can get whipsawed by a moving average, you’re in trouble. If you’re a value investor, who is surprised that your stocks can get cheaper still, you’re in trouble. If you like fixed deposits, and you’re surprised that they will lose purchasing power and you’ll pay a third of your returns to the taxman, you’re in trouble.
Surprises are bad, really bad. It means we planned poorly and maybe we don’t know what to do next.
So how should someone subscribing to a long-term, passive, buy-and-holdand-rebalance strategy set his or her expectations? Here are some of the things you need to know up front:
1. There will be extended periods of time when you hate parts of your portfolio. Really, every year you’ll hate something in the portfolio. Every. Single. Year. Sometimes you’ll hate something for five years - expect it.
2. You will almost never have interesting cocktail party anecdotes. You’ll become bored with the strategy at some point. Friends will tell you about their conquests in Facebook, Google and Netflix, and you won’t have a war story to share with them (unless you get really excited about rebalancing). You’re boring – expect it. 
3. You will be convinced, eventually, that the strategy is “broken.” This is closely related to #1. How can this strategy work if we would have done so much better if we just owned (insert asset class here)? You are going to want to throw in the towel. Maybe because everyone else is making more money than you, maybe because your buddy said his advisor got him, “out before it went bad”. You’re going to feel the pull to change course – expect it. 
4. You will experiences losses. Your portfolio will, to some extent, participate in bear markets. You own invested, marketable assets. Some days other market participants will be very willing to buy those assets from you at a reasonable price. Other days they won’t come within 100 miles of your holdings. Face it – the stock market spends something like 80 per cent of the time down from their highs. You can’t always be at all-time highs. You will eventually see new highs, but not always. You’re going to see the portfolio decline in value – expect it.
If you can understand this going in, you’ll have a shot at being a successful investor. If you allow yourself to be surprised by the realities of your investment strategy, it will be tough going.
Bill Longstreet is a partner with Shanghai based Caterer Goodman Partners, a primarily fee based financial advisory firm. For more tips on how to handle your savings, check out their blog,