Just One Word

Today, I would like to answer the question that has no right answer.

Sounds like a fun little exercise, right?

I want you to take a moment and ponder this query:

What is the single most important word in personal finance? 

One’s answer to this question could evolve and morph over time.  Depending on your season of life or recent experiences, perhaps your answer changes.  For others, maybe the answer to this question is the same as yesterday, today, and tomorrow.

Personal finance is… personal.  So, you’d expect a wide array of answers when addressing a question like this.

When I asked my colleagues here at The Bahnsen Group, “What is the single most important word in personal finance?” Here’s what they said:

Plan/Planning (5)
Discipline (4)
Security (4)
Trust (3)
Saving (2)
Clarity (2)
Patience (2)
Time (2)

* The number in parentheses signifies how many respondents provided that same answer.

I think my favorite answer from this list was “How.”  So simple, so raw, so true.  Personal finance can feel complex and overwhelming, and people just want to know how.  How to invest, how to plan, how to achieve their financial goals and an endless list of other how-to questions.

For me, my one word – at least for the time being – would be the word expectations.  As a practitioner, I’ve had a front-row seat to see exactly how investors behave, and I’ve come to learn how crucial good investor behavior is to financial success.

So, what drives good investor behavior?

First, let’s talk a little bit about happiness.

The study of happiness has drawn a lot of academic attention over the last few decades.  With the notable rise in anxiety and depression, people are more curious than ever about what makes happy people happy.  Some studies have even dedicated their research to identifying what countries are the happiest.  Ultimately, much of this research is looking for correlations, seeking to answer this question: What do happy people (or happy countries) have in common?  Here’s one of the primary findings, happy people have low expectations.  When you have low expectations, it’s hard to be disappointed.  Said another way, people with high levels of contentment tend to be happier.

Now, back to finances…

It is contentment that drives good investor behavior.

Please don’t misunderstand me here, contentment is not a lack of ambition or a feeling of settling.  Contentment is all about calibrating your expectations.  A content investor can stick to their plan when markets take off booming to the upside or when markets blow up to the downside.  A content investor doesn’t get envious of their neighbor’s short-term speculative winnings or anxious about volatile markets.

I often find myself encouraging my advisor colleagues to strive for clarity when reviewing portfolios with their clients.  I think clarity can help investors appropriately set their expectations.  I sometimes will refer to this as the “no surprises” rule.  An advisor’s job – as best as they can – is to eliminate surprises by thoroughly describing how a portfolio will behave.  Why? Because financial surprises can be unsettling for investors.  When surprised, investors find themselves being caught flat-footed, and survival mode kicks in, causing them to lean more on their emotions than their plan.  This is an environment not conducive for good decision-making.

They say, “Defense wins championships.” In personal finance, the number one opponent you will face is… you.  Defense, for you, is protecting yourself from yourself.

So much of setting the right expectations is simply in how we frame things.  With investing comes risk, right? And in the world of investing risk is synonymous with uncertainty – the future is unknowable or uncertain, and we call this risk.  So, how does one create clarity in the midst of uncertainty?  We use history as our guide, and we think in ranges rather than absolutes.

You’ve probably heard it said that the stock market typically averages returns of 8% to 12%.  Yet, if you look at the annual returns over the last 50 years, you’d find that only on two occasions did the actual return fall between that range of 8% to 12%.  Averages are achieved over long time periods (e.g., a decade of results), but the year-by-year figures that make up those averages are wide-ranging.

So, to calibrate my own expectations, I set a range of possible outcomes defined by what I’ve seen historically.  This allows me to flip an uncertainty into a certainty.  Yes, neither you nor I know what the return of the stock market will be in 2023, but I am very confident that it will fall somewhere between down -40% and up +40%.  If that’s my expectation, it makes it pretty difficult to be surprised.

Now, you might think what I just said it is silly or unreasonable because of how wide that range is, but what I noted there was just one of my expectations.  Another expectation is that those ranges of possible outcomes will get narrower over time, putting the odds more in my favor if I am willing to be patient.  I expect that if I stay invested for 10 to 15 years that my stock portfolio will at least double in value, which historically has typically rung true.

Do you see what’s happening here, I am building my expectations one truth at a time, which is forming my worldview or investing paradigm.  I am building a foundation of expectations that I will lean on or rely on to help me endure as an investor.

This is why I can answer most client questions – not all, but most – in conversation without needing to dedicate much research or additional pondering because I am drawing my answers from this well of financial expectations that I’ve accumulated over time.

In life, when you set low expectations, you will often find yourself being pleasantly surprised and a tad bit happier.  In investing, when you set reasonable expectations, you will often find yourself being less surprised by how markets behave and perhaps even a tad bit happier.

For me, I’m convinced that expectations – although rarely discussed or referenced in the personal finance conversation – are a crucial component to how an investor will ultimately behave.  I’d even go as far as to say that most financial decisions we regret can be linked back to some particular unhealthy or unreasonable expectation we set along the way.

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Author

Trevor Cummings

Private Wealth Advisor, Partner

Trevor is a Partner and Director of our Private Wealth Advisor Group.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.