It’s been said that the key to a good marriage is low expectations. I’m not sure that’s true, but it brings me around to the stock market. If you are going to be invested in stocks for the long term (which is the best way to invest), it’s kind of like a marriage. If your expectations are too high, you might find yourself giving up before long.
Stocks haven’t seen a down year since 2008 (and boy, was it down!). Since then, it has roared back, producing more than 254% of price appreciation and dividends. Eight straight years of growth, and unless something happens in the next three and a half weeks, it will be nine straight years of positive returns. Do you know how many times that has happened in the stock market? Not many!
Interestingly, when it comes to the stock market, actual future returns tend to be worse when past returns look their best. Yet, investors’ expectations for future returns tend to reach their peak at such times. This positive correlation between past returns and future expectations is rear-facing, and doesn’t make much sense to me. Smart investors ought to be especially aware during times when the market has experienced long bull runs (as is presently the case).
Now, I’m not in the business of predicting near-term market movement. But I do know something about the interaction of price and value. I can tell you that the price for the average stock has definitely gone up faster than its value over the past several years. History says that market forces tend to even the score every so often. Eventually, the stock market will have a bad year or two (or three).
Stocks can still be great investments to own over the long-term. So, if you’re already invested in stocks, or thinking of getting in soon, then consider our current market environment. And set your expectations a bit lower.
Great investor Paul Cabot said, “First, you’ve got to know the facts. Then you’ve got to face the facts.” Lowering expectations isn’t just good psychological preparation – it also makes good common sense. Belief will affect actions, and actions will affect outcomes. And outcomes, ultimately, is what separates the good investors from everyone else.