Having realistic expectations

It is absolutely understandable that investors hope the best for their investments. This could mean a lot of things like not losing any money at any time or constantly requiring extremely high returns. This all comes down to the famous relationship between risks and profits. It is hard if not even impossible to achieve high returns without taking some risks and the more risks you take (assuming that these risks are well understood and that they are the consequences of a well designed overall strategy) the higher returns you can hope. Unfortunately, it is also true that the most risks you take, the most chances there is that you will lose money. The key point for any investor is to have both a well defined strategy and realistic expectations about the potential returns. We are often contacted by potential investors that believe that it is not that difficult to obtain average annual returns of 30-40% when investing in stocks. These new investors have no real experience of stock markets nor sufficient financial knowledge. They often base their view on some random fact like a specific stock which doubled over the last year. For them, it was obvious that investors should have bought this stock a year ago.Unfortunately, in real life, it does not work like that. You can never be 100% sure about what the future holds. Let’s take an easy example to illustrate this non-sense: An investor starting with a relatively modest portfolio of $100k in a given year and making an annual return of 40% for the following ten years will end up after only 10 years ,and without adding any new cash, with a portfolio worth of $2.9 million! Ten years later, assuming he or she keeps the same returns, he or she end up with more than $83 million!! That sounds great for sure, but that also sounds extremely unlikely to ever happen. Never forget what Lord Keynes once said “The market can stay irrational longer than you can stay solvent.”

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