Successful investing is largely about managing expectations. How else to explain the fact that the Great Recession of 2008 took out many investors — perhaps permanently? According to Gallup, in April, 2007, 65% of U.S. adults had money invested in the stock market. Today, just 55% do.

Apparently, for some investors, the losses were too painful to bear. Their experience was shockingly different than what they expected. To a great degree, that’s understandable. It was a brutal time to be an investor. Between the fall of 2007 and early 2009, the U.S. stock market fell by half. All investors felt the pain.

Pain’s volume control

No one likes to see losses in their portfolio, and it’s been well documented that, for most people, the pain of loss is much stronger than the satisfaction of gain. That pain is further magnified when there’s a wide expectations gap, that is, when we experience something far worse than what we anticipated.

So, as investors, it’s essential that we check our expectations.

While no one could have anticipated the magnitude or the timing of the losses incurred during the Great Recession, everyone who invests in the stock market has to realize that there will be times of loss.

During most months, years, and even many individual days, the market moves around a lot. As the following slide from JP Morgan Asset Management shows, the market can be down quite a bit in a given year only to end the year in positive territory. For example, in 2016, the S&P 500 fell -11% at one point, but ended the year up +10% overall.

In 2013, depicted below, the market ended with a remarkable 30%+ gain, but there were six significant downturns along the way. Each time the market fell, you can be sure that many investors wondered whether it would continue to fall, and if so, how far.

By the same token, 2018 was shaping up to be a fine year, with the S&P 500 hitting a new all-time high in late September. Then came the fourth quarter, when the market dropped 15%, pushing the year’s performance into negative territory.

With many market watchers on high alert for an end to the long-running bull market, it seemed that the time had come. But 2019 started strong, with the market hitting new highs in May and July. And on it goes.

Those expecting 2018 to turn out well were wrong. And so were those expecting an end to the bull market. Especially in the short-term, there are often significant gaps between what we expect and what we experience.

On a more macro level, the next slide shows all of the bull and bear markets since 1926. As you can see, bull markets have lasted longer than bear markets and they’ve added much more value than bear markets have taken away.

Knowing all of this won’t necessarily lessen the pain most investors feel when the market heads south, but it should help manage expectations. While no one knows when the next bear market will take hold, everyone should know that there will be another bear market.

A strategy you can stay with

In our new investing-focused small group resource, Multiply, we teach that a trustworthy investment strategy has four characteristics:

  • It is driven by an objective investment selection process (i.e., it follows clear, unbiased rules);
  • It is easy to understand (could you explain to a middle school student what you’re invested in and why?);
  • It has a successful track record (you can see how it has performed under various market conditions, and it has delivered the level of long-term returns needed to meet your goals);
  • It is emotionally acceptable to you (you’re willing to stay with it, come what may in the markets).

All four are important, but the acid test is your willingness to stay with the strategy. Checking that fourth box has everything to do with being able to check the first three.

Still, no strategy will work perfectly all the time. For investors, that too is an important form of expectations management.

What have the ups and downs of the market told you about how well you’re managing your expectations?