The Art of the Good Life #49 : Managing Expectations

To manage expectations, you need to organise your thoughts into three categories.

The first category is something that "you must have".  This is an absolute necessity. On hindsight, one of my absolute necessities is to complete my legal training. This means going through a lengthy practice training and skipping out on a fairly decent job offer. Positioning something as a necessity can be extremely limiting. Only time will tell whether I made a right move in insisting that I be called to the Bar before moving on. For readers, I strongly suggest you keep these limitations to a bare minimum. Pride and ego is expensive.

The second category are desires. Life is not worth living if you have no desires. I desire a Creative Super XFi Air. I also desire a Pixel 3 XL. Since APTV tanked, I have dropped my desire for a new iPad Pro Tablet preferring to buy more stocks with my next round of earnings. You should have desires, but ordinarily, you should not be shackled to them.

The last category are expectations. This causes the most unhappiness because they may be influenced externally and cause tremendous internal damage that can shake our very confidence in ourselves.

This is important for investors. 

My latest back-testing for a portfolio of equal-weighted REITs returned 19+% over the past decade. This is coupled with an extremely low semi-variance of 10%. If you mentally anchor to these numbers, you are guaranteed to be miserable because the past 10 years saw a lowering of interest rates and a recovery from the Great Recession of 2008. Financial figures exhibit non-stationarity. 

To balance against this, I create benchmarks for investment strategies to see which investment strategy is better.

In my opinion, investing in REITs for the next 10 years in an era of rising interest rates is unlikely to return 19%. But at least I can say with some authority that filtering out the REITs with the highest yields and lowest gearing has a large probability of outperforming an equally weighted REIT portfolio or even the STI.

This is the attitude a good investor needs to adopt. Markets will smash your expectations and damped your confidence. 

In fact, I actually believe that the next two years at least will be bad for investors. 

Losing money is almost guaranteed given that investors will sell Singapore stocks when the US markets start to trend downwards in spite of our low CAPE ratio. 

But the good news is that if you double up on pumping your funds into a low volatility portfolio over the next 2-3 years, you have a decent chance of catching the bottom of the market.

The winners of tomorrow are the heroes who conquer their fears in the investment markets for today.