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Expectation versus reality | Business

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When we buy a stock, we need to consider numerous potential outcomes. Investment expert, SimonPB, explains how we can properly manage our expectations and analyse different outcomes beforehand to avoid the risks such as confirmation bias.

Founder and director of financial and investment education website JustOneLap.com, Simon Brown.

Nerina Visser of etfSA once said something about risk that has stuck with me. She commented that risk is when the unexpected happens. She was talking about exchange-traded funds and her logic was that if you bought an ETF to track an index, your expectation is that it will track that index and if it does, nothing unexpected has happened. So, falling or rising markets are neither a worry nor a risk.

Now, this sounds odd, because if the market falls, so does the ETF which tracks that market. But that is the point she was making, and it changes how we see risk. Instead of risk being solely about losing money, it becomes expectation against reality. Sure, we can always lose money, but when we’re buying a stock, how do we think about that purchase? We focus on the potential reward; we dream of it becoming a ten-bagger as it increases by 1 000%. But what if we’re wrong? What if it loses us money and instead of being a ten-bagger it’s rather one of those dogs in your portfolio that you try not to look at, promising yourself you’ll sell when it gets to break-even. Quick spoiler: they never do recover, so sell your portfolio dogs now.

 

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