Setting and Managing Investing Expectations

Here is the cliché response to winning the lottery:

I would quit my job, pay off all my debt, spend a little on myself, invest the rest, and retire.

So what does it mean to “invest the rest?” When posed with the question I have heard many responses:

  • Put it into savings and live off the interest
  • Put it in mutual funds
  • Put it into stocks
  • Diversify
  • Start a business

So what is the correct thing to invest into? Well, it really depends on what you want from it. Many don’t actually take the time to determine what they want from an investment, or even why they are investing. Many just do it because that’s what a person is supposed to do, right?

So let’s ask ourselves a few questions:

1. Why are you investing in the first place?

  • For retirement?
  • To get rich?
  • For fun?

By defining your reasons for investing you will be able to better plan the approach or methods you will use for investing. You don’t want to jump into riskier investments if you are planning on retiring in a few years.

2. What do you expect from your investments?

This is actually a tough question to answer. Do you expect low amounts of risk and high returns? It’s important to keep things in perspective. If you expect returns of 10%, then you should expect $100 for every $1,000 of investment. Many times investors look at the actual amount of returns and do not compare it to the amount they invested and their expected return percentage. While $100 may not seem like a lot, if it is in line with your expectations then there is no reason to be disappointed. If you are still disappointed, then you might want to re-evaluate your expectations.

3. What if your investments fail?

You always want to look at this as a worst-case scenario. What if you lose everything? Investing requires capital, so where is that capital coming from? Is it from your second-mortgage? Is it from your student loans? Or is it from extra money you have saved up for such an endeavor?

It is especially important to have an exit strategy. It is not a sign of weakness, but a sign of maturity and risk management. Investments are always a gamble, so be prepared if they do fail.

Last point: Set and stick to goals

One of the hardest parts of investing is knowing when to stay in and when to get out. For example, with stocks, set high and low sell points so that you won’t incur too much loss if the price tanks and you can get out at an amount that you will be satisfied with. Same can be applied to entrepreneurship and real estate. Set hard goals so you know when to get in and more importantly, get out.

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Comments
10 Responses to “Setting and Managing Investing Expectations”
  1. Jessica says:

    Nicely done Gian! I liked how you had the words on the video while you were talking.

  2. G, I loved your last post. Most of us are completely uneducated as far as investing and the expectations involved may not be realistic. Right now, what would you say the best thing would be for us small timers? Miriam

    • Gian Sorreta says:

      The first step would be to figure out what you want from investments 😉

      If you want to get a good feel before jumping in I would suggest trying out one of the stock market games.

      A popular one is: http://vse.marketwatch.com/Game/Homepage.aspx

      One thing to remember is that risking virtual money is a lot easier than risking real money, so keep that in mind when making decisions in the game.

  3. Great article. Understanding that capital is always required for investments I feel is something that may not be thought of by most.

  4. Well said Gian!

    I think your last point, “Set and stick to goals” really is the foundation of what you are touching upon. Your goals will often lead to a process(es) that requires meeting certain expectations. However, without truly knowing your goals, or the purpose behind your actions, you will eventually end in a place where you lack motivation.

    If you don’t know exactly what you are doing and for what specific purposes you are doing them, you will no-doubt have some devastating setbacks. If there is no strong motivational force pushing you onward, you may very well throw in the towel and quit altogether.

    I think setting and managing investing expectations is heavily rooted in setting and understanding personal goals and what must be done to achieve them.

    • Gian Sorreta says:

      I can attest to the importance of sticking to set goals. I had some stocks that increased in price. Instead of sticking to my plan and selling, I became greedy and held out for it to go higher. I held on without any news or data to back up holding on, other than the stock going up from mere momentum.

      Well, it dropped and I didn’t make as much as I should have.

  5. Eddy Harsh says:

    Solid post with sound advise, G. Agree that keeping expectations realistic (going high risk runs the possibility of big losses, obviously) and setting goals is the best place to start for anyone new to investing and not quite sure which direction they may want to go yet.

    • Gian Sorreta says:

      Thanks Eddy. Even now I still have to work on sticking to my goals. The gut desire to get more from my investments (which adds a lot of unnecessary risk) is hard to overcome at times.

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