Bluefield Daily Telegraph, Bluefield, WV

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August 7, 2012

Investment strategy involves weighing risks

Let’s take a look at what may be considered a reasonable expectation of investment returns. We hear that the long-term average annual return of the stock market since 1930 is somewhere between 9 percent and 11 percent.

One of the challenges in managing any portfolio is setting realistic expectations. When we were in a

secular bull market from 1982 to 2000, it was easier to achieve higher returns. However, in a secular bear market like we’ve been in since 2000, it’s much harder.

Can you achieve higher returns in today’s market, perhaps 10 percent, 15 percent or 20 percent? Of course you can. But doing it will require much higher levels of risk and active trading. What if it doesn’t work out? Can you stand the volatility or afford the loss?

As investors, we cannot afford to turn a blind eye to risks. Understanding your potential reward is worthwhile. Understanding your potential risk is everything.

So let’s look at investment performance from a real world view. If you were to measure your performance against the S&P 500, which is up about 9 percent year to date, you might not have done as well if you had been quite conservative with your investments. What if you were conservative and made only 4 percent? Is that bad? Well, if you compare it to the overall stock market, yes. But how many people would actually have their entire investment portfolio in the stock market? Very few.

However, if you compare it to the risk-free rate of return, that was pretty good if you didn’t take a lot of risk doing it.

If you could make 4 percent on a risk-free investment (and were happy with that), but instead you invested in a diversified portfolio of stocks and bonds and earned 5 percent — well, that’s not too impressive.

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