The optimist expects good outcomes.  He’s often disappointed.  The pessimist expects the worst.  He’s pegged as a doom and gloomer.  The realist doesn’t have expectations.  He keeps on open mind.

Who’s right?  No one.  But who’s happiest?  The realist.  Why?  Let’s have a look.

We like to plan for the future.  We like order – not chaos.  We like a feeling of control.  Unfortunately the financial markets don’t cooperate.

Markets are chaotic.  Here’s what the S&P 500 looked like from 1978 through 2017:

Including dividends (but not adjusted for inflation) the S&P 500 returned 12%/yr.  That’s the upward sloping line indicating average annual performance.  Superimposed is a jagged plot.  That’s the actual annual performance.  Notice a difference?

During this 40-year run the S&P 500 spent 78% of all months above its growth rate.  In its best month it was 300% higher than its growth rate.  In its worst month it was 37% lower than its growth rate.

Expectations are a recipe for unhappiness.  Better to be prepared for highly likely probabilities than to spend time worrying about expectations.  So how best to prepare?

  • Have plenty of dry powder.  No matter how much we hear about having an emergency fund few of us have one.  Why?  Few of us have a true understanding of what we spend.
  • Keep plans flexible.  Saving and spending are two sides of the same coin.  They need not occur at the same time.
  • Be realistic.  Life is unpredictable.  Not everything can be controlled.  You won’t win all the time.  You won’t lose either.  Don’t get overly positive or negative or to paraphrase Joe Paterno don’t get too high during the highs or too low during the lows.  You’ll sleep better and be less inclined to take action for the sake of doing so.