In the first of an eight-part series, Research Affiliates addresses market returns and the dangers financial planners face with respect to setting expectations for clients.
Specifically, the article highlights the following key points:
- Using historical returns to forecast the future is one of the most common shortcuts in financial planning” although, the article points out, the topic hasn’t received the same attention as fees, the need for rebalancing, performance chasing, or diversification.
- The article addresses how to set investment objectives within the context of what can and cannot be controlled (for example, an investor can choose a date for expected retirement and spending rate during retirement but cannot control life expectancy).
- Starting market conditions matter, the article says: “Advisors intent on producing better outcomes for their clients need to communicate realistic return expectations not only for the destination (investment-horizon retirement savings), but for the duration of the journey.”
- Past returns versus expected future returns: “Investor behavior,” the article says, “indicates a profound belief that past is prologue,” but such biases can be “unhelpful or even dangerous.”