About Reasonable Returns on Investments
Investment returns can range all over the map, from double-digit returns year after year to negative returns on the money invested. To cut through the hype and understand the investment markets, it is important to look at the long-term historical returns of the stock market, the bond market and fixed-income investments. Keeping your investment expectations in the reasonable range will help you avoid costly mistakes and help to keep your investments on track.
Other People Are Reading
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Time Horizon
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To put reasonable investment returns into their proper perspective, it is important to consider your own time horizon. Obviously, the time horizon for a new college graduate starting his or her first job will be different from the time horizon of a worker preparing for retirement. The amount of time you can let your money ride will greatly influence the returns you can reasonably expect.
For instance, investment advisers often recommend that workers within five years of retirement scale back their exposure to the stock market and ramp up their bond holdings and fixed-income investments. Since stocks have historically yielded more than bonds and fixed-income vehicles, this scaling back will reduce the yield those investors can reasonably expect, although it also will reduce their risk accordingly.
Risk Tolerance
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The concept of reasonable returns will also be affected by your own mix of investments. The recent volatility of the stock market has taught investors a valuable lesson, and many of those investors found that their tolerance for risk was quite a bit lower than they had thought. It is therefore important for all investors, no matter what their exposure to the stock market, to assess the risk of their portfolios and how that risk can affect reasonable returns. A portfolio that is skewed toward stocks may generate a higher return over a long period of time, but that portfolio will probably see some wild swings along the way.
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Your Perspective
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It is also critical for investors to understand that what constitutes a reasonable investment return will change over time. Young investors who can afford to invest heavily in stocks may be able to achieve the 8.41 percent rate of return the stock market provided during the most recent 20-year rolling period, while older workers with less exposure to the stock market may have to settle for a different definition of reasonable. Investors who want to check out the historical stock market returns for other periods of time can find a wealth of information at http://allfinancialmatters.com/2009/09/18/sp-20-year-rolling-period-returns-1926-2008/.
Standard and Poor's 500
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While it is not an all-inclusive index, the Standard and Poor's 500 index can be a good stand-in for the stock market as a whole. Looking at the long-term performance of this index can provide investors with a good sense of what they can reasonably expect of their investments. While past performance is never a guarantee of future returns, the relative consistency of the S&P 500 returns over a 20-year time horizon is quite impressive. For the most recent 20-year rolling period, the index has returned 8.41% annually, and this time period includes the stock market crash that took place in late 2008. Investors who want to check out the numbers for themselves can do so at http://allfinancialmatters.com/2009/09/18/sp-20-year-rolling-period-returns-1926-2008/.
Past performance
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Every investment advertisement includes the caveat that past performance is no guarantee of future returns, but many investors fail to take this advice to heart. Even so, it is important for everyone who plans to invest in the stock or bond market to understand this important fact. Historical returns provide an excellent benchmark for all types of investors, but those returns are by no means a guarantee.
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