If you look at the future returns, by valuation level, in the chart in yesterday’s post, you see that the higher the initial price, the lower the future returns. This makes sense both theoretically and empirically, but it creates a problem for investors right now, in that their expectations are totally out of line with what has happened in the past. While investors often expect miracles, many investors today are essentially relying on one—and have no idea that is the case.

The problem isn’t limited to stocks, either. For bonds, assuming interest rates remain the same, returns are the coupon payments—and then you get your money back. Your real return is coupon less inflation, which means on a par, on a real basis, with what stocks are likely to return on average. If rates rise, on the other hand, you could face capital losses, which would further erode returns. The only scenario in which bonds might make up for lower stock returns is if interest rates decline—and that’s very unlikely to happen on a consistent basis over the next decade. Anyone looking for higher returns won’t do it in bonds.

I closed last week with a discussion of how, for individuals, the focus should be on actually achieving their goals, and how risk measures (and the portfolio design process) should be oriented to managing the risks that really matter—in my opinion, drawdowns.

Closely related to this is the issue of expectations. Just as variance of returns isn’t the best measure of risk for individuals, longer-run measures of return are also misleading in this context. Many of the guides put out for investors talk about long-run returns, focusing on the need to stay the course. Just as with rationality and variance, this is a pretty good approximation for institutional investors, who have that kind of long time frame and whose liquidity needs aren’t typically onerous. For individual investors, though, whose time frames are measured in a handful of decades at most (and who will actually need to spend the money at some defined point), this is misleading and damaging. As we have seen, there can be multi-decade periods where, in fact, returns do not match previous expectations—and if the money isn’t there when needed, the investment process has failed.

The Yogi Berra post I did a couple of days ago drew a distinction between steady single investments and home-run investments. Baseball is a popular metaphor for a number of things, but, given the intersection of statistics and uncertainty, it’s particularly relevant for investing. Michael Lewis, for example, is noted for writing about both Wall Street (Liar’s Poker) and baseball (Moneyball). Nate Silver, the former New York Times political statistician, has made ventures into both finance and baseball.

A key to success in each of these areas is to determine which numbers actually matter. This is one of the issues at the core of Moneyball. I would argue that we have the same problem in investing, particularly for individual investors. We’re simply looking at the wrong things.

I want to continue on the path I started with yesterday’s rerun post, but a couple of things came across my desk today that, together, warrant discussion. They’re examples of the kind of slow, steady progress in the economic recovery that, over time, is adding up to big things.

Let’s start with Washington, DC. The federal government—and particularly Congress—has been part of the problem for so long we kind of expect it to be a drag. The recent unexpected budget agreement (for two years even) was a positive sign, but it left open the possibility that legislators wouldn’t be able to agree on actual spending numbers. The passage of a spending bill yesterday by the House on a vote of 359–67, with 167 Republicans voting in favor, says that both parties are now focused on solutions rather than creating train wrecks as a negotiating tool. In particular, it shows that the Tea Party caucus no longer has the power to force the rest of the Republican party to vote against a deal. You can argue over the economics or the politics, but the uncertainty created by the prior theatrics was undeniably harmful, and the fact that they’ve come to an end (at least for now) is a good thing. This is also a good signal for the pending debt ceiling negotiations early next month.

I originally wrote this article for InvestmentNews back in 2008—forever ago, in the financial world. I want to revisit it now for a couple of reasons (and also because I’m kind of proud of it). First, I think it’s held up pretty well and is still applicable, despite all the changes since then. Second, it sets the stage for an extended conversation that’s becoming increasingly important for investors and advisors.

That conversation revolves around expectations—i.e., what are you trying to accomplish with the portfolio?—and risk. We have the standard questionnaires and measures of risk and return, but, based on my frequent conversations with advisors, I’m not sure those tools really capture the dynamics of what’s going on. We need to do better.

I’ve spoken with several reporters yesterday and today, all of whom are asking, “What is happening in the stock market?” In some respects, it is a little unreal—not that long ago, a market decline of about 1.25 percent was considered normal volatility. But given how the market has climbed almost continuously for the past several months, a decline like this has people asking questions.

Perhaps they should be. The market pause since the end of last year could be suggesting a couple of things investors ought to be aware of. If you look at performance at the end of 2013, you see a consistent run-up from October to early December, a pause while everyone worried about the Fed and the taper, and then a last burst of energy. Since then, it’s been bouncing around, but with a downward trend, exemplified by yesterday’s performance.

A couple of weeks ago, we had a fairly spirited debate in an Asset Management department meeting over the economic consequences of raising the minimum wage. Just for fun, and because I like to argue, I strongly took the pro side, contending that the positive consequences would outweigh the negative. This is not a particularly common (or popular) stance in the economics and investing community, but it turns out that you can make a good case for it.

Listen to Brad’s interview on MarketWatch, where he discusses the stock market’s behavior in the first weeks of 2014.

After all the optimism embodied in the Fed’s recent minutes, at least as I read them, the employment report this morning was a shocker. Instead of the expected 200,000 or so gain in jobs, the figure came in at 74,000, well below the lowest estimate. What the heck happened?

Reading through the December meeting minutes of the Federal Open Market Committee (the group that decided to start reducing the Federal Reserve’s monthly purchases of Treasury and mortgage bonds), I was very surprised. Considering the Fed has, historically, gone out of its way to be obscure, the minutes’ clarity was unusual. In the words of former chair Alan Greenspan, “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”

The Fed under Chairman Bernanke has made an effort to be more straightforward, but it still tends to focus on “one hand, other hand” discussions. Harry Truman’s search for a one-armed economist goes on.