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Happiness = Reality - Expectations

There are no shortages of complex formulas in finance; there is one that advisors & clients all need to understand

The above quote was originally spoken by late NPR radio host Tom Magliozzi. The simple formula posits that if our expectations are too high for a given situation, a good result can still lead to disappointment. This does not mean we need to have artificially low expectations. Rather, we need to have realistic expectations. This is particularly true when it comes to investing and working with an advisor.

As with any new relationship, getting to know each other takes a little time. When each side is open and honest, it makes for better outcomes. A financial advisor needs to lay out how they plan, manage, invest, communicate. Advisors need to be realistic when explaining how client portfolios are expected to perform. Clients also need to be forthcoming with their expectations. If a client is expecting unreasonably high annual returns, whereas the advisor is explaining the benefits of diversification and a balanced portfolio, the client is going to be unhappy as reality will underperform their high expectations.

A common area where this arises is in a client portfolio underperforming the S&P 500 or some other broad index. The S&P 500 may not be an appropriate benchmark for the client’s entire portfolio, so the comparison invokes unhappiness. Attempting to beat an index just for the sake of beating the index introduces unnecessary risks a client presumably is unaware of. This MarketWatch article provides more context.

Setting expectations does not mean telling clients what they want to hear but showing how their portfolio should perform over time and through various cycles. Beating a single index is typically not the goal of an individual’s financial plan. The plan, and resulting portfolio, are designed to meet that client’s specific needs. The range of potential outcomes grows over a longer period. Showing the possible paths helps clients understand how their assets will behave in different scenarios and correctly sets expectations.

Every advisor will not gel with every prospective client. That’s why finding the right fit may take several conversations. It is a long-term partnership. Describing a process and philosophy works best without jargon and complex formulas. Happiness = Reality - Expectations is one formula that every client and advisor should understand very well.

See blog disclosure at bottom of main blog page.


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