Managing expectations is as important as managing money. Investors often overly focus on managing money without understanding how to set their expectations. Developing the wrong set of expectations is the most common mistake investors commit.
Setting return benchmarks which are unrealistic lead to disappointment. Yet, investors are mostly unrealistic when they set their return expectations from equity investments. For instance, investors never assume that their investments can go down in the short term. Often, investments remain at the same value as their purchase levels for a long time.
This should not matter in the long run if the investments are fundamentally strong and positioned well. A sound investment premise should back every investment decision. Investors must still be ready to see their investments go down in the short run. That they lose value, should not make the investor lose faith in them.
Investors must spend enough time and effort in decision making. Hurried decision making should be avoided. If wrong decisions are made in haste, then the time spent waiting in the long investment cycles will be wasted. When decisions are well thought through, spending time with the right investments will seldom fail.
In the present scenario, we are witnessing investors being too aggressive in expectation setting. Both investors and investment managers are to blame for this. If you take the past few years as the benchmark for setting future return expectations, you may be overestimating them. If an investor does this, he has only himself to blame. But, if an investor is led on by a professional, the investor must find ways to moderate his own expectations and to be more realistic. Moderating near-term expectations is the top priority of every investor.
Another important priority must be to own the right assets. A sound future facing portfolio must have all the right assets. This could mean making the necessary changes in time. This has to happen on a priority basis.
One needs to ask the right questions to protect their interests. Many portfolios which are overloaded with riskier investments based on recent performances run the risk of going down in the near term. If your money has been allocated into the wrong places in the last two years, the next two could be doubly difficult. On one hand, you could see themes and categories you avoided doing very well. On the other, your own investments could lag. Investors are not used to such a phase as the last six years have mostly seen secular moves in the market. In a market which sees divergence, owning the right parts is of utmost importance. Right now, people need to ensure they own the right parts of the market. There is a strong need to own safer parts of equity, to reduce exposure to expensive businesses and themes, and to keep liquidity to continuously invest during a market slowdown.
Where the underperformance is already stark, you need to evaluate what can bridge the gap and create a rebound. If you cannot find immediate drivers in such lagging investments, you need to move capital towards better investment choices. But, you also need to show patience in owning the more stable, larger companies in a market correction. Remember that they could be the first to rebound in a market recovery when the growth rebound happens.
Knowing where to show patience and where to show urgency will be critical now. Treating the whole equity book the same way will not work when the market sees sharp divergence in direction. We are going to see divergence in the market over the coming quarters. Investors have very little time left to prepare for that phase. The time left for creating bullet-proof portfolios is running down fast.