A casual conversation with a DIY investor was extremely educative. The investor had made returns of 18% by investing from the COVID bottom. He believed that performance was sustainable annually and consistently. Telling him that his expectations were high was not going to cut much ice with him, but understanding why he was setting unrealistic expectations was very important.

Firstly, his experience in equity investing was from a bottom to a peak. His compounding performance reflected the entire performance of the market getting captured in his portfolio. He believed that such a performance was sustainable. This brings us to a basic folly that most investors commit.

Investors fail in their investing mostly due to the wrong expectations. By setting the wrong expectations, investors set themselves up for decisions that are oriented towards a misdirected risk strategy. This time the number of retail investors who are setting the wrong expectations is very large. Their recency bias is very strong, and their overconfidence seems to be running high.

This raises a basic question. What are the consequences of setting wrong expectations? You will create a portfolio that will ignore imminent risks, not carry the required liquidity to participate in unexpected events, and fail to move money to safety from stocks that have performed beyond expectations. Excesses will pervade your risk-taking, liquidity management, stock picking, and liquidation of holdings. Creating excesses will weigh your investment returns down in the future.

Investors must reset their return expectations to protect their profits and prepare to perform better in the coming years.

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