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Equities & Expectations

June 28, 2023

Equities & Expectations

We spend a lot of time speaking about managing emotions and investor behaviour. Setting expectations is a big part of that. Now, why would setting realistic expectations be so important to our client’s long-term experience?

First and foremost, setting realistic expectations is central to confidence, commitment, and happiness in any aspect of life… including finances. If we know that market declines are inevitable, but temporary; then we know that markets don’t create losses, behaviour does.

By working closely with clients to set reasonable expectations, holding equities for the long run can become much easier. For instance, we should expect a double-digit decline in equities every year or two. Expect that some years other assets will do better than what you have. Expect that weak markets are a necessary part of investing as investors can’t benefit from the good times, without also going through tough periods.

Expectations are like a debt that must be repaid before you get any joy out of what you’re doing.

– Morgan Housel

Let’s rewind 8 months and revisit the investing landscape from last fall. 2022 was a long year for investors as the main theme of inflation and rising interest rates played out. The Bank of Canada took rates from 0.25% in January 2022 to 4.75% today1, higher than we’ve experienced in nearly two decades… a shock from what we’ve become accustomed to.

The key piece to remember here, when setting our expectations, is that 4.75% is a much more “normal” rate environment throughout history than 0.25%, (even though it feels high right now to some). Where do we go from here? The answer of course is that no one knows (but that’s not the point).

The point is that for the first time in a decade, it made some investors question their investment plan and feel attracted to the temptation of shorter-term guarantees earning 4-5% interest.  Expectations have a funny way of working like that. “Why would I own equities when I could get 4-5% in a 1-year GIC?” It became a shift in mindset. A perceived sense of security, while earning a fair return. This chatter could be heard all around financial institutions last fall.

As many of our clients know, we strongly believe that investing in equities is paramount for the long-term. It is engrained in our philosophy and integral to building long-term wealth (and helping you achieve your goals!).

Fast forward to today, the main North America stock markets are up 10-25%+ since last fall 2.  We aren’t going to make predictions on how the rest of the year goes, nor would we ever put much emphasis on short-term returns anyways. The point here is that in investing, taking the ‘comfortable’ option in the short-term is rarely the right decision for your long-term goals.

Esteemed planner Nick Murray wrote in his book “Simple Wealth Inevitable Wealth” the keys to remember for investing in equities:

  1. Don’t panic, the secret to wealth in equities is to not get scared out of them.
  2. You can’t predict but you can plan. Month in and month out, patience and discipline will be your sword and shield.
  3. Don’t try to go at it alone; hire an advisor/coach whose primary function is to help you be better than you are.

1 https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
2 As measured by the TSX/S&P Composite, S&P500, and Nasdaq returns on finance.yahoo.com/world-indices  

It is our strong belief that to be successful in reaching your goals it is necessary to have a plan in place and to follow a process. That is, to make your life and financial decisions not by accident but by design.

Remember, successful people ACT towards the future they want!

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