What Are Adequate Returns?
How much should your investment portfolio return?
This is the million-dollar question that no one will be able to answer. Because at any given year, the overall market will greatly impact returns.
Nobody knows how much the current bull run will provide in returns.
Nobody knows when or how much of a fall we will have in the next crash.
You can be sure there will be a crash, the question is when and how big of a crash.
This is not financial advice, just educational content.
Long-Term Returns
If you look to invest in the long-term (which means 20 to 30 years), then you might have some idea. History shows that, most likely, you will have an 8-10 percent annualized compound return. This by being in the stock market as a whole.
What does this mean? It means you would double your investment in roughly 7 to 9 years. Keep in mind that this compounds, so if you were to stay in the market for 30 years, you could 10x to 17x your initial investment.
The problem? Most people don’t have a huge portfolio to put in the market and wait 30 years. Let me put this in perspective for you.
If you have $20,000 that you put on the market, at an annualized 8% compound interest, you will get $201,000 in 30 years. If you have $500.000 (say from a company sale), you’d have just above 5 million in your portfolio value if you keep reinvesting.
If you invest $100 a month in your portfolio, at the same 8% annualized compound return, it will take 35 years and $42,000 of your investment to reach the same result. To reach 5 million it would take $2.000 monthly investments for 38 years.
How much you start with and how long you have makes a significant difference.
About timing
Timing shouldn’t matter because over time crashes tend not to matter. But do keep in mind that there have been markets stagnating for decades (think Japan). Long-term returns incorporate the average 10 year crash and natural market corrections.
That's also the reason you should never go after some guru who has made 10-20-30 percent returns in the last 5 years. It's just not a big enough sample. Migh be the real deal, or most likely something else.
It’s important to look at history: the market peak of 2001 took seven years to recover to, just to crash another 54% in 2008. Which then took another 4 years to recover in 2013 to the 2001 peak. Those wwere 12 years lost. These movements are something you need to be prepared for.
What does this mean?
It means that if you stick long enough (think decades) in the market, you can expect close to 10% compounded annualized returns. You can also expect that in any given 10 to 20 years your portfolio can lose 30-50 percent of its value. And will recover for an average annualized return of 10%.
How fast will it recover? You don't know... Usually relatively fast, meaning 5-10 years. This means that after a bust, growth is bigger.
Stocks and Bonds
The reason to have bonds in your portfolio, is to protect from volatility, and keep your overall portfolio steadier
Some people say bonds and stocks aren’t negatively correlated, I don’t care much to discuss whether they’re right or not.
Here’s what I consider instead:
What do governments do when a financial storm hits?
They lower interest rates, and this has always been the case in the past 100 years. When rates go down, the Bond value goes up. So it is very very likely that when there's a stock market crash your bond portion might offset that loss.
Will it cost in returns, if interest rates are low, it will. But as interest rates have been going up, the gap is currently reduced. Which means you can have a higher portion in bonds without a significant loss in returns.
That’s why the 50/50 approach works. You will see fewer gains as the market is riding up, but you will see significantly fewer losses when a crash happens. And not losing capital is the first priority of an investor.
I will explain how this is done through portfolio rebalances, which should be done at least once a year, ideally every six months. In a later time.
Can you do better than the market?
You can if:
You invest a significant portion of your time researching for company adequately priced or underpriced. (This is not watching Bloomberg for the next company fad).
You mind your investment expenses and taxes. These can take a big chunk of your gains.
Low cost invesment
ETF’s seem like the best option for most personal individuals:
They have very competitive fees.
They transact similar to stocks.
Some reinvest dividends.
But this is up to each person to decide if they want to take the time and analyze for better deals and likely outperform the market. This is not hard or requires a special set of skills, just the time for research and an adequate general framework for pricing companies.
Whatever route you choose, you must have nerves of steel, or just forget about what the market is doing. So you don’t sell your portfolio at rock bottom because the end of the world is near, and your portfolio has lost 50% of its value.
If it’s the end of the world, does it matter?
As good as the market
If you don't have the time or knowledge to invest, you can always tag along with the market, through a very simple strategy of 50% in a full market ETF and 50% in Bonds (which you alos have ETF's for).
This will guarantee you will have the same performance as the market, for most people this will beat most money managers, due to lower than market returns and overall high pricing.
Key takeaways
Being in the market for 20-30 years is important.
During a long period you can expect 8-10 percent annualized returns.
Starting earlier with a greater amount is worse than investing the same amount over time.
Peace and Goodness my friend,