Setting Expectations

This month, I would like to explore how expectations have changed in a relatively short time frame.

Going back pre-social media and pre-pandemic (do you remember those days?), expectations were set on a local level.  Family units, local school systems, and the local economy helped create an individual’s expectations.  A college education could have been a family expectation.  Spending the summer hanging out at the lake might have been the perfect vacation.  The school district expected students to be in their seats all day from 8am until 3pm, when extracurricular activities would start.  An employer probably expected the employees to be at their desks from 8 until 5 pm Monday through Friday.

Fast forward to today’s world.  Due to social media, kids’ expectations of vacations have changed dramatically.  As an example, a few years ago my daughter mentioned how jealous she was of a friend who was posting pictures in the Bahamas for Christmas – while my daughter was on her way home from the airport where she flew home from London, England!  Schools offer both in person and online classes.  In many cases, employers still haven’t returned full time to the office.  Finally, jobs have changed to the point where many people are getting paid serious money to be an “influencer” on social media.  This is incomprehensible to “old people” like me.

What does this have to do with investing?  Lately, the media and “experts” have commented on interest rates, saying things like “historically high rates,” and making predictions about the effect the rates will have on the market and the economy.  While the level of interest rates will certainly influence the markets and the economy, these statements do more to establish expectations for investors and consumers than explain current events.  As of December 18, 2023, the Fed Funds rate is 5.25-5.5%.  The average mortgage is between 7 and 8%.  Both numbers are considerably higher than 2020, when the Fed Funds rate was around 1.75% and the average mortgage was closer to 3 ½%.  Frightening?

Well, let’s look back over time.  Anyone who bought a house, or a certificate of deposit in the 1990’s would chuckle at the idea that interest rates are high.  Back in the 1990’s mortgage rates hovered in the 7-11% range, with the Fed Funds rate on July 13, 1990, hitting 8%.  By May 16, 2000, the Fed Funds rate dropped to 6.5%, and mortgages stayed in the 7% range.  When did the Fed Funds rate significantly change (along with mortgage rates)?  On June 25, 2003, the Fed Funds rate was 1% and mortgages were down to around 4%.  The rates stayed the same (even dropping to effectively 0%) over the next 17-19 years.  I personally refinanced my mortgage twice over the past 5 years to below 3%.

So back to expectations…if you bought a home in the 1990’s, you felt pretty good if you only paid 7% on your mortgage.  Yet today, if you are asked to pay 7%, it’s historically high?  This type of change in expectations occurs daily when reviewing portfolios too.  Over the last 30 years, the S&P 500 (including dividends) has averaged 9.862% rate of return.  However, individual years tell a very different story.  The Total Return of the S&P 500 in 1995 was +37.58%, +32.39% in 2013, and +23.63% as of 12/15/23.  In 2002, it was down 22.10%, -37% in 2008 and -18.11% in 2022.  Depending on your portfolio holdings, you could be higher or lower than each of these numbers.  Were you a rockstar with a 10% average return or upset that you only had a 30% return in 2013?

My point to this blog is simple.  Expectations need to be set based on your personal goals, experience, risk tolerance, time horizon and asset allocation.  When you allow someone who doesn’t know you to set your expectations, you will be disappointed even when you perform extremely well under conditions. 
 
Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS
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Disclosures:
*Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.