Unreasonable Expectations Lead To Chaos

Charles MacKay was a Scottish journalist, novelist, and poet, best remembered for his comprehensive study of crowd psychology and behaviour. His book, “Extraordinary Popular Delusions and The Madness of Crowds,” appeared in 1841 and is still a useful text.  It has been out of copyright for about half a century. You can get a PDF here.

I recently came on this thought from Charles.

“Three causes especially have excited the discontent of mankind; and, by impelling us to seek remedies for the irremediable, have bewildered us in a maze of madness and error. These are death, toil, and the ignorance of the future.” Charles MacKay

We have reduced the discontent related to toil and death, but ignorance of the future remains high on the list of problems. Our ignorance of the future often leads to a bewildered maze of madness and error.  His perceived cause of the madness and error is seeking remedies for the irremediable. Careful please. 

Many of us would like a definitive answer to a problem even though there is no such answer to be had. Our expectations betray us. Faulty expectations lead to faulty actions and to too early changes. The bewildering maze of madness and error.

If you are trying to organize your life to maximum advantage, the biggest failing will come from the inability to hold manageable and measurable expectations. Learn what is reasonable and leave a little room for error and the unforeseeable. 

Suppose we look at accumulation of wealth for retirement. We know quite a lot about the past and nothing about the future. They may rhyme but there is no guarantee of that. 

What is a reasonable rate of return?

All of these numbers are pretax and pre-expense so be a little cautious. 

  • Canadian equity total returns for 1969 to 2016, 8.90%
  • Government long bonds 7.10% and short bonds 6.0%
  • American stocks 11.9%
  • European stocks 10.5%
  • Inflation 3.2%

So in Canada, before costs and taxes, stocks beat inflation by 5.7% and long bonds win by 3.9%. 

Earning 8% over inflation for a long time as many would think possible, would be nice, but you should not expect to do so. History is not on your side. 

Things are a little different in the short run. Over the past 5 years, stocks are up 7% over inflation but bonds just 1%.  That range might give you pause.

Investing is a tedious and error prone process. Even done well the outcomes are highly variable and variability makes people uncomfortable. People are linear and markets are chaotic. People who hold an expectation that markets will be chaotic do better than ones that worry about variability. People who have a guide helping them keep reality in perspective, do better still. 

Financial planning is a part of life planning. Psychologist Frederick Herzberg called things like that a hygiene factor. It does not motivate much but it can be destructive. Like washing your hands will not make you healthy,  but failing to do so can make you sick.

Seek help establishing expectations.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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