SECTION III: INVESTMENT PRINCIPLES

Managing Return Expectations

Another important role you, as a Registered Representative, must fill is educating your customers on realistic investment performance, so they can manage their return expectations. When suggesting an investment option to a customer, you can analyze historical returns to help your customer understand past performance over time. However, past performance is not a guarantee for future performance. Also, it's important to keep in mind that problems can arise when short-term historical results are used to formulate long-term return expectations, or vice versa.

In addition, the potential for a positive return might be foremost for the customer, who may expect high returns from inherently low yielding investments. This results in long-term investments funding short-term goals, or vice versa. Your role is to communicate realistic long-term investment returns and realistic short-term investment returns, especially short-term market value losses.

In addition to investors having the correct return expectations for specific asset classes, investors also need to be made aware of the impact that inflation will have on their investment returns. This is because overall rates of return can be eroded by inflation. Therefore, it is important that Registered Representatives explain to investors the net effect that inflation might have on their long-term investments.

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