Keeping Your Cool: Why Your Best Investment Strategy Is Managing Your Own Expectations

Think of the last several years in the stock market like a long stretch of beautiful, sunny weather on a cross-country road trip. When the sun is shining and the roads are clear—much like the double-digit returns we’ve seen in six of the last seven years—it’s easy to forget that we might eventually run into a thunderstorm or a bit of fog.

While we’ve all enjoyed the growth in our financial houses, I want to take a moment to look at the road ahead. Success in retirement isn't just about picking the right investments; it’s about having the right mindset when the weather eventually changes.

The "Rearview Mirror" Trap

It’s human nature to look at what just happened and assume it will keep happening. In the world of behavioral finance—which is just a friendly way of describing how our emotions affect our money—we call this recency bias.

When we see the S&P 500 (an index of the 500 largest companies in the U.S.) posting huge gains year after year, our brains start to think that 20% returns are "normal." But if we look at the historical data, the ride is usually much more varied.

If you look at the history of market returns, you’ll see that in any single year, the stock market can be a wild ride—swinging anywhere from up 60% to down 41%. However, as we look further out—at 10- or 20-year periods—those extremes start to smooth out. The lesson here? Don't let the "sunny weather" of the last few years trick you into speeding; your long-term plan is built for the average, not just the highlights.

The Pain of the "Red Dots"

I often say that losses loom larger than gains. Psychologically, losing $100 feels twice as painful as the joy we get from gaining $100. This is called loss aversion.

Because of this, many investors get spooked when the market takes a temporary dip and they end up selling at the exact wrong time. But here is a secret: even in the "good" years, the market almost always has a scary moment.

Even in years where the market ends up 25% or 30%, we often see significant pullbacks of 10% or more along the way. My goal is to help you stay in your seat during those "red dot" moments so you don't miss the recovery that often follows.

The Bottom Line

We can't control the markets, the economy, or what happens in Washington. But we can control our own behavior. By understanding these natural emotional biases and sticking to a disciplined framework, we can ensure that your financial house remains strong, no matter what the weather brings.