Setting New Year Financial Expectations

We are at the start of a new decade. This means lists and reviews of the past year and ten years. Along with these retrospectives, we are treated to a healthy dose of predictions for what is to come (too often by financial gurus, unfortunately). This is click bait. An invitation to bog ourselves down in the deep past (nostalgia) or the uncertain future (prediction). It can be fun, for sure, as you can see in this interesting read in the Chicago Tribune from 2010, that notably fell short of predicting a Cubs championship.

I am a history buff and I am keenly aware of how I can get lost in thought about bygone eras. I also work in a financial industry where we are asked to predict what will happen in the markets, interest rates, or politics, as if we had a crystal ball. Financial professionals can’t consistently and accurately predict, but that doesn’t stop investors from expecting guesses, or the pros from obliging. How did the pros do recently? Heading into 2019, the Federal Reserve expected to keep interest rates steady. Instead, they lowered them three times. In 2019, Goldman Sachs expected the S&P 500 to return 7%.  Total return at year-end is over 30%. With these limitations in mind, here is how we can use reflection instead of nostalgia, set expectations rather than predict, and become better investors in the process.

Setting Financial Expectations

Living in the past or trying to predict the future takes our focus off the present where we can learn, act, and influence our lives. If we try to set goals based on our nostalgia for the past, we can become anchored in what was rather than what could be.  If we plan for the future by picking the outcomes of events that are out of our control, we limit our ability to influence what we can. Specifically, our response to the world around us. On the spectrum of the past, present, and future, there is a better, more actionable way to look behind us and look ahead: Reflection and Expectation.  Think of it this way:

setting expectations timeline

Reflecting on our financial past helps us learn from the decisions and habits that have been successful or that may set us back.  If you managed to stay invested through the volatility of 2018, you were probably rewarded by strong returns in 2019. A good reminder that avoiding emotional money decisions can be impactful. Being nostalgic, on the other hand, means we ignore present circumstances and make investing decisions based on a world that no longer exists.  For example, investors may want more income from their investments like they had back in the days of 5% interest on savings accounts. But that’s not where we are right now with interest rates being so low.  We have to invest for the world we live in, not one that we remember from years ago.

Reflection also helps us to observe what has changed in our circumstances that might require our attention.

Here are some questions to reflect on at year-end regarding financial goals:

Reflection also helps us to observe what has changed in our circumstances that might require our attention.

Here are some questions to reflect on at year-end regarding financial goals:

  • With the growth in my stocks over the last few years, does my portfolio have the right balance?
  • Did I have enough cash on hand for emergencies last year? How much do I need now?
  • Did I contribute sufficiently to my retirement plan last year?
  • How successful was my retirement income plan? How much did I take in income vs. principal?

By asking these questions, we learn about where we have come from and how we might respond in the present. The next step is to look forward to the future in a way that does not seek to predict specific outcomes, but instead to manage our financial expectations.

Planning for the Unexpected

If we think about our expectations as the anticipation of how events could impact us, it draws a stark contrast with prediction. Prediction sets up a binary outcome: We are right, or we are wrong. And what if we are wrong?  It happens to the best of us, and, if our money is at stake, the consequences could be severe.

The more prudent course is to set expectations of what could happen, and plan for the unexpected. Being right or wrong about whether something happens should not derail your financial plan. Instead, it is helpful at the beginning of the year to set expectations about the things that could happen and, more importantly, which of them could impact us the most.  That way, right or wrong, we can be flexible and decisive.

Here are some question you might ask yourself to manage financial expectations for the future:

  • What returns do I need to achieve annually to keep my plan on track?
  • When would I consider an ideal retirement date? What if stopping work is not up to me?
  • What are my plans for gifting to charity or within my family and what is the best way to accomplish them?
  • With interest rates where they are, what kind of income should I expect from my investments in the year to come?

Asking questions like these can help focus your mind about the financial year to come. It also may be a good starting point for a conversation with your financial advisor.

Our choice in the New Year can be to avoid the extremes of nostalgia and prediction, and instead embrace reflection on the lessons of the past and managing expectations for the future. The former involves certainty and hubris. The latter embraces learning and humility which are the traits of any successful investor.