Investment expectations should be considered and reconsidered


August 21, 1994|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

What do you expect your investments to do? Do you expect them to go up? If so, by how much? (If not, why are you still holding them?)

Are your expectations based on logic and facts, or are they more like wishful thinking? Although it is impossible to predict the future, it can be useful to have some sound, rational expectations. How else will you know whether you are on the right track?

Investment expectations have become more important as financial markets have become more volatile. Interest rates, stocks, real-estate holdings, precious metals and commodities have been on a hair-raising roller coaster ride for the past 15 years.

Investment expectations are estimates of future performance. Rational expectations include the range of possibilities for both risk and return. They should combine six risk/return factors:

* Price changes: The easiest way to put price estimates into perspective is to make three projections: best case, worst case and most likely.

* Historical returns: Over long periods of time (10 years or complete market cycles), similar investments have had startlingly consistent patterns when viewed in real terms -- that is, when inflation is taken out: Common stocks have returned about 6 percent above inflation. Long-term corporate bonds have returned about 2.5 percent over inflation. Treasury bills and other money market instruments have returned about half a percent more than inflation. Real estate prices have tended to match inflation.

* Historical volatility: Has the past pattern of price changes been gentle (little swings) or violent (big swings)? In the past, stocks used to be volatile, while bonds were more stable. However, since 1979, bond prices have become almost as volatile as stock prices.

* Income (that portion of returns that comes from interest or dividends): Will income grow, remain stable or decrease?

* Safety of principal and income: What are your chances of getting your money back? What are the chances of continuing to get that income, interest or dividend in the future?

* Liquidity: Is it easy to sell? Are there costs if you want or need to sell your investments in a hurry?

Given these considerations, are your investment expectations realistic?

It's realistic to expect not to lose money on an insured certificate of deposit. But it's not realistic to expect that a common stock would only go up. Of course, in most cases the higher the expected return, the higher the risk that you won't earn that return or that you'll end up losing part or even all of your investment.

At least once a year, compare actual performance with your expectations. If your projections have not been met, it may be time to reassess the situation.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan Bondy in care of The Sun, 501 N. Calvert St., Baltimore, MD 21278. All letters will be treated confidentially.

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