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What do you consider a reasonable rate of return?

Discussion in 'Investing' started by TomB16, Nov 3, 2018.

  1. TomB16

    TomB16 Active Member

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    I had a specific idea about reasonable rate of return until a few years ago when I read someone on another forum state that 8~10% is all that can reasonably be expected. For some reason, I threw out my idea and adopted that instantly.

    We've done far better than this reasonable expectation but I always project with 8%, as I feel that is the most that can be reasonbly expected.

    I would appreciate other points of view on this.
     
  2. rg7803

    rg7803 Active Member

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    If you manage to obtain - over the years and in a consistent way - a rate around 10-12% you are a world class trader.
    If you get 8 to 10% in a solid form, I think its a pretty good number.
     
    TomB16 likes this.
  3. Onepoint272

    Onepoint272 Well-Known Member

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    Back about 1985, when I started to have disposable income to invest, I read a book which had 3 major take-aways, none of which I have been able to fully exercise, one of which is probably still prudent advice, and 2 of which shortly became impossible to practice. Those were:

    • When the money market funds reach and exceed a 12% annual return, switch investments to the money markets
    • When the money market funds fall below 12%, switch investments to stocks
    • Maintain 5% of portfolio in precious metals
    As background to this strange advice and clip of time, at least in regards to the first two bullets, one has to look back to the 60s and early 70s when the Congresses of Lyndon Johnson and Richard Nixon were spending on guns and butter. Probably more important though, the baby boom generation increased consumer spending in the 70s and the demand for products and services exceeded supply and prices rose exponentially with inflation rates in the double digits by the time of the Jimmy Carter presidency. Although Ronald Reagan is often credited with ending this era, it was Jimmy Carter who appointed Fed Chairman Voelker who drastically raised short-term rates, ultimately and painfully ending that inflationary era. In the early 80s it was thought nothing to buy a house with a mortgage rate of 15%.

    So, when that book I read came out it was already stale advice and short sited since it was based only on a look back of a few years, because as we all know, by 1985, the market was in the infancy of a huge bull market in stocks and even more-so in bonds. In fact the S&P rose an average of 24%/year from 1985 to 1990, took a rest from 1990 to 1995 increasing only 9.5%/year and then exploded from 1995 to 2000 rising an average of 46% per year. Between 2000 and 2013 the market was flat. Of course it was up and down in that 13-year period. Here is a break down:

    S&P 500 Average Annual Returns
    Jan 1985 - Jan 1990 (5.0 yrs) Up 24.1% per year
    Jan 1990 - Jan 1995 (5.0 yrs) Up 9.5%
    Jan 1995 - Mar 2000 (5.2 yrs) Up 46.1%

    Mar 2000 - Oct 2002 (2.6 yrs) Down 19.5%
    Oct 2002 - Oct 2007 (5.0 yrs) Up 21.0 %
    Oct 2007 - Mar 2009 (1.4 yrs) Down 40.7%
    Mar 2009 - Aug 2018 (9.4 yrs) Up 35.9 %

    So what is a reasonable annual return? I think it is reasonable to expect a return that at least matches the S&P, otherwise we might as well just invest in the SPY and concentrate only on identifying the general market tops, which is crucial no matter what.
     
    #3 Onepoint272, Nov 4, 2018
    Last edited: Nov 4, 2018
  4. WXYZ

    WXYZ Active Member

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    I agree with ONEPOINT. I use the SP500 as a benchmark to my portfolio and I believe EVERYONE should do the same. Because....if I can not beat the SP500 over the long term, than I should simply put all funds into a SP500 Index Fund for the long term. As to a reasonable rate of return, ONE of my two investing goals is to generate an average annual return of 10% per year over the long term. I am content to double my money every 7.2 years. I guess I should be CONTENT, since 10% is a GREAT return. The long term average for the SP500 is about 10% per year. Of course, the average investor will end up WAY BELOW 10% due to the typical investor behaviors that drive down returns. As I have mentioned in THE LONG TERM INVESTOR THREAD (shameless plug for the thread), I have two goals investing:

    1. Try to beat the SP500 EACH individual year.
    2. Achieve a long term average return of at least 10%.

    Over my lifetime I have achieved number two. Some years I achieve number one and some years I dont. It is especially important to beat the SP500 on the down years not just the up years. It has been specific single stock bets that have allowed me to achieve goal number two and at the same time beat the SP500 over the long term. Investments like MSFT in 1990, holding till 2002. Other BIG investments over the years.....SBUX, NKE, COST, AMZN, MO, AAPL, etc, etc. I have been lucky enough to buy these sort of companys once they are on the way to becoming a powerhouse but before the masses jump in......a fine line to achieve. I am also a FULLY invested all the time investor......no market timing, no Technical Analysis, no dollar cost averaging.
     
    T0rm3nted likes this.

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