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Even if you’re not one to pay attention to investment forecasts, we’re all likely curious of what 2023 will bring to our wallets.READ THE ARTICLE
Uncertainty overpowers expectations: While analysts attempt to predict what the year ahead might look like, the reality is, investment results are made up of two things: Expected returns and unexpected returns. And as you might have guessed, unexpected returns are impossible to predict. They often override the widely-known, 10 percent long-term average return of a diversified stock portfolio.
Here’s why: This is because “events like wars, financial crises, pandemics and unforeseen inflation” can cause dips. And, “life-changing technological innovation, robust economic recoveries and vast expansions” can lead to upswings. Both event categories are unexpected and can many times cancel one another out, but in the short-term, “unexpected returns drive almost everything.”
The exception: In the case of bonds, however, you have more information regarding expected returns. Their ability to return your initial investment back to you – combined with the “coupons” they also deliver on predetermined dates – means they offer greater clarity in potential outcome. Here, the unexpected holds less meaning, giving bonds more predictability.
Bottom line: While you should leverage expected returns in your long-term planning, you should neutralize your plan against unexpected short-term returns.