I have seen a few spectacular trend reversals in financial markets in my time. However, the current market decline now counts as one of the worst for how long it has continued and how few assets have escaped. US shares have fallen by about 20%. US tech stocks have fared even worse – the decline is heading for 30%. Apart from rising interest rates, investors are spooked by the impact of inflation on company profits.
Companies like Netflix and even retailers like Target are now saying that they will not meet profit expectations. What we’re seeing is a lesson about the importance of expectations. When investors anticipate that prices can only go up, and expect companies to deliver increasingly spectacular profits, we should take note. When you hear phrases like, ‘you cannot go wrong when you buy in this area’ or ‘had you bought a year ago, you would have doubled your money’, it indicates high expectations of future returns.
The problem with high expectations is that they can easily be disappointed. And disappointment leads to disinvestment which can easily start a downward adjustment. On the contrary, when expectations are low, you are less likely to be disappointed. There may be a higher probability of your expectations being met or even exceeded.
Of course, low expectations do not necessarily lead to good investment outcomes when the prospects of the investment are poor. Realistic expectations from reasonable investments is preferable to overly optimistic expectations of the most spectacular opportunities.
The same is true for life. Young people generally have high expectations of life. Of progress. Happiness. But as the reality of life sets in, normally around midlife, people may be disappointed. Melancholy sets in. It can last a long time. Until we adjust our expectations to the reality of ageing and life’s complexities, after which we become more content.
Similarly, unrealistic expectations from relationships or marriage, such as expecting others to meet all our emotional needs, or validate our identities or self-worth, can be a setup for failure too.
Realistic expectations of life may be a key ingredient for life satisfaction. We should tread with caution when expectations are high.
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