It’s that time of year again when students around the country are graduating.  Finishing one long journey is a combination of fear, relief, and joy, and looking forward to the one to come is part of what makes it such a special moment.  It’s also a great time for personal reassessment, and the expectations an eager graduate sets today may have a measurable effect on their future success.

Much has been written in recent years on the accelerating expense of a college education and the rapidly changing job markets for college graduates.  Getting a college degree is no longer a guarantee of career success nor a ticket to the wealth fast lane.  Your particular choice of degree will greatly affect your odds of gainful employment, but because of the associated costs it may not necessarily be a net financial positive to go back and earn a new one if the first didn’t meet your career expectations.  Growing and adapting is a part of life, but changing course too often has a measurable drag on individual outcomes.

Similarly, many people approach investing with the mindset that if one simply puts their money in the stock market then financial success is all but guaranteed.  But that’s not necessarily the case on your personal timeframe, and the idealized returns of a particular strategy are sure to let you down at times.  Just like changing degrees is very costly, changing portfolios is extremely costly as well not just in taxes paid but also as a result of selling low and buying high.  Repeat that cycle a few times, and you’ll be much worse off than if you had just stayed the original course and had the perseverance to make it work.  Investors are their own worst enemy.

So why is picking a wise portfolio and sticking with the plan so difficult?  Volumes have been written on the inner workings of investor psychology, but if I were to pick the primary factors it likely comes down to two — greed and fear.  With an unlimited number of available investing options, it’s natural to envy other portfolios that have superior recent performance and the temptation to switch and buy high can be very strong.  And when markets are crashing all around you, the fear of losing even more is a powerful motivation to sell low.  Sticking with the plan that isn’t meeting expectations is way harder than it sounds.

That’s where I personally believe that greed and fear have a single deeper root cause — unrealistic expectations.  One’s expectations of career prospects or investment returns is too often based in a highly myopic and idealized perspective that lacks any true understanding of uncertainty and downside risk.

Just because your degree has a small chance of making you extremely happy and successful does not necessarily make it a wise choice, and you may be back in a few years doubling down on student loans for a new path to fund your passion.  And just because your investments had a bad stretch does not mean they are broken and in need of a replacement, as you may find later that what looked like the superior path at the time ultimately resulted in a financial dead end.  Expectations matter, and properly framing them is a critical step in making good decisions.

Fundamentally, the exploration of portfolio expectations is a driving force behind Portfolio Charts.  While most discussions about asset allocation choices focus on recent performance or long-term averages that can be easily sorted for the best-case scenarios, tools like the Start Date Sensitivity calculator demonstrate just how often portfolios chosen by these methods have disappointed investors.  For example, the 10-year return that an investor experienced with the total US stock market has not lived up to the previous 10-year return they saw advertised when first buying-in since 1991.

As disappointed investors are significantly more likely to sell low and buy high out of either fear or greed, investors with unrealistic expectations are also significantly more likely to make less money in the long run than an investor who knows what he or she is getting into and sticks with the plan.

Taking a different approach, I find tremendous value in the data that most fund promoters completely avoid — the stats for the worst historical outcomes.  By setting  expectations to the worst the markets have thrown at a portfolio, investors can make educated decisions to help them meet their important life goals with minimum risk.

Safe withdrawal rates are a widely-discussed number with exactly this mindset, but the same idea can be applied to accumulation as well.  For example, think about how the stock market once lost 37% in a single year and went a full 13 years without maintaining a positive real return.  How does that change your expectations for your own projected returns?

Taking it a step further, how might focusing on the worst single year and worst 15-year return for every possible portfolio choice affect your decision making process?

Every calculator on the site very intentionally avoids single averages that hide the worst-case scenarios.  Some like the Heat Map and Portfolio Finder above actually highlight the worst times.  The big picture is far more important psychologically than many people realize, and I fully believe that when it comes to smart investing decisions knowledge is power.

So here’s my challenge to you as you browse the portfolios and calculators for inspiration:

 

Take a moment to completely ignore the best long-term returns

 

Cover them with your hand if you have to.  Really think about the worst times for each portfolio option, and realize that these are actual historical returns that real investors experienced.  Tell yourself that you are not special and that this is exactly the return you may also see just like many people before you.  Whether it’s losing half of your money in a single year or not seeing a profit for more than a decade, is the reality of this experience something you’re truly prepared to endure without changing course?

If not, perhaps a more stable portfolio even with a lower CAGR may actually make you more money in the long-run!  And by being educated on the downside risk up-front and comfortable with your choice, you’ll likely also be much happier even while others around you are panicked about the markets or are envious of alternatives.

Whether it’s your degree to ultimately fund your investments or your portfolio to grow and protect them, your important life decisions deserve an open mind and a clear understanding of all possible outcomes, not just the historical average.  So educate yourself on the uncertainty and downside of your choices.  Your education will make you realistic about future outcomes.  Your realism will allow you to stay calm in times of turmoil, as none of it will surprise you.  And your peace of mind will allow your chosen path to work as advertised by persevering rather than perpetually changing course.

Studying the past can’t predict the future, but it can definitely prepare you for it.  With a well-considered plan in place, you’ll be ready for whatever life throws at you.