A big part of being a good investor is managing one’s own expectations. Critical in this is reminding ourselves that there can be times when a low return can look very good. We have gotten spoiled these past few years with double digit returns and in some cases we may have begun to expect those returns every year as the norm. Unfortunately the markets don’t work that way and years of very high returns are almost inevitably followed by periods of low or negative returns. In weak markets, seemingly mediocre gains in the low single digits can look quite good. Remember the tech bubble bursting in 2000-2003? During that period some of the best performances were posted by funds and money managers who were thought to be dogs in the late nineties. In fact, by virtue of their consistent returns, many of those managers produced better long term results than some of the earlier, hot funds that were posting enormous returns just a few years earlier. There are times when it is smart to be happy with lower short term results because you may find that by avoiding later losses you’re a bigger winner overall.

A common mistake inexperienced investors make is to set a return expectation and try to manage their portfolios to that return goal. The problem arises when they inadvertently increase their risk level as they pursue higher returns in mediocre return environments. Unfortunately, this dialing up of risk frequently happens at the worst possible time and they end up with a loss. At the risk of stating the obvious, chasing high returns is not an investment strategy. Market returns do not come in a nice, straight line. Accept the fact that there will be times when your investments will not post huge returns and look for long term results that will pay off over time. Sometimes the low, seemingly mediocre returns you get today look very good compared to the losses generated down the road by today’s seemingly high return darlings.

Randy Gridley

October, 2007