When people start investing, many of them have this idea that riches are just around the corner. By investing in a “hot stock,” they think that they will be able to see huge returns and strike it rich in a matter of months.
This isn’t the only erroneous expectation that many have for their portfolios, though. Dreams of huge annual returns over time lead some to think that putting in a hundred dollars a month with dollar cost averaging will lead to a nest egg a million dollars when they decide to retire.
While it’s true that investing can help you build wealth, and it can be an efficient way to see greater returns over time, it’s important to realize that you need to have realistic expectations. Your expectations for returns are likely higher than you can truly expect to receive. If you don’t want an unpleasant surprise down the road, it’s important to temper your expectations.
Sustainable Gains Take Time
First of all, it’s important to understand that sustainable gains take time. If you don’t have a huge amount of capital (and even if you do), you aren’t going to see big returns for your money in a short period of time. You will only be buying what you can afford, including partial shares, so building your portfolio is the work of years.
You can’t start investing right now and expect to see massive gains immediately. And you also have to realize that the likelihood of timing the market just right to enjoy great investment success is more about luck than anything else. Expecting that your investing genius is going to result in big gains is unrealistic.
You Probably Won’t Average 10% Returns Over Time
We always hear that we shouldn’t rely on past performance to predict future results, but we like to historical precedent anyway. Many predict “conservative” returns of 7% to 8% on a stock-heavy investment portfolio, but are quick to say that the annualized return is historically closer to 10% or 11%. This means that many people assume that they are going to receive 10% returns on their portfolios.
Sadly, this just isn’t very likely when you look at the volatility in the markets right now and the changing macro outlook. When making plans, many people plug in 8% to 10% returns into the online calculator. They are comfortable putting $200 in each month, and think that their retirement accounts will grow to what they need in 30 or 40 years. If you do end up with 10% interest, you could see more than $1 million at the end of 40 years. But what if you are only 7% interest ($480,000), or 5% interest ($290,000)?
That’s a big risk to take. If you want to find success, it’s important that you step back and double-check your perceptions. Try for a more realistic view of what will happen with your portfolio, and realize that you need to temper your ex