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Investing: Are your expectations aligned with reality?

The following column from Jennifer Pagliara , CapWealth Senior Vice President and Financial Advisor, was posted by The Tennessean on Dec. 16, 2018.

In the midst of the holiday season, the most magical time of year can engender unrealistically high expectations in all of us. As if the pressure to get the perfect gift for everyone you know isn’t enough, there are a host of parties and events to attend. And to put a cherry on top, most companies are trying to wrap up the year, potentially adding to your workload.

It’s easy to start the season feeling all warm and fuzzy, only to wind up wondering what happened to the magic once it’s all said and done. One way to keep your wits about you — and actually enjoy the holiday season — is to set realistic expectations for what can be accomplished amidst the year-end, holiday hustle and bustle.

The same can be said for your investment portfolio and saving for retirement. In our business, the best thing we can do for clients is to help them understand the factors that affect their returns and set realistic expectations for future earnings.

This was brought into the light during a meeting I recently had with new clients. They, like me, are millennials and graduated from college during the financial crisis. Because of this, their investment accounts and employer plans have had exponential growth, as they have capitalized on the bull market we’ve been experiencing. They said to me, “If we can keep our accounts growing at an annualized rate of 14 percent, I think we’ll be happy.” Not only was I shocked by this statement, I knew it was my duty to realign their expectations.

So, what should investors expect their returns to be? Well, you can look at the S&P 500, the index made up of the 500 largest American companies, and you’ll see that it has returned approximately 10 percent per year from 1928 to 2016. However, that’s not an appropriate way to benchmark potential future returns — there are so many additional factors that must be considered.

One major factor is inflation — many people don’t account for inflation in their retirement planning. If you accounted for average inflation of 3 percent each year, the real return of the S&P 500 noted above would be more like 7 percent.

A few of the other factors to consider are:

Risk tolerance: There is a principle called the risk-reward trade-off that affects the potential return an investor can get. As the potential return rises, there is generally an increase in risk. Everyone would love to take no risk and have an annualized return of 15 percent, but that’s just not possible. As we all know, money can be a very emotional topic. You need to be on board with the amount of risk you are taking to ensure you are comfortable with the range of possible outcomes.
Time: As the saying goes, if it seems too good to be true, then it probably is. Generally, there are no successful get-rich-quick schemes in the stock market. Time is a huge factor. The more of it that you have, the better. It is easier to withstand the market corrections when you have time to make up for it.
Fees: No one wants to pay more than they have to in fees. Generally, financial advisers charge somewhere around 1 percent. Investors need to account for this in the long term.
After explaining to my clients that the average return (over a long period of time) was actually closer to 7 percent, they started to realize how extraordinary their returns have been over the last 10 years.

I advise everyone out there to ensure that your expectations are in line with what your financial adviser can deliver based on all of these factors. Once you have all the information about your investments, you can begin to accurately prepare for the future. Jennifer Pagliara is a senior vice president and financial adviser with CapWealth and a proud member of the millennial generation. Her column speaks to her peers and anyone else that wants to get ahead financially.

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