Election 2016: Surprise and The Improbable

No matter where you lie on the political spectrum, the outcome of the 2016 election was a surprise to most people. The media got it wrong; the polls got it wrong and even the betting market (where real money is at stake) had the odds of a Clinton win at 80% as the polls opened. States that were sure things ended up flipping with no advanced warning. The markets had priced in a Clinton win. As usual, when the market prices in one thing and something else occurs, it gets surprised and needs to re-price.

Expected Returns

One of the core inputs required in the financial planning process is the assumption of what the future return of the security (portfolio) will be. Obviously higher returns are preferable because they translate into greater spending power and/or reaching your goals sooner. Yet higher returns come with a caveat; higher risk. There is a very strong correlation between risk and return. So the higher the desired return, the greater the risk of losing money over a period of time.