While vacationing in Skaneateles, NY with my family last month, I was chatting with my cousin about the return his financial planner has been getting for him. When he said “5%-8%” I immediately thought, “Yup. That’s what EVERYONE says when I ask about their planner and the return they usually get for their clients.” He used the phrase, “It’s a conservative approach”. I’ve heard it before. It’s what most people think and do: Put your money with the planner, let it sit for 20 or 30 years, then retire, right?? Not so fast…
I wanted to share with my cousin how, by making a small change in his annual return, he can make a HUGE impact in his portfolio. If you’re reading this blog, you already know how to get higher annual returns (diversify OUT of the stock market – sound familiar?) So let’s look at what will happen. We remember the worst case scenarios well: The last 5 years. For our example, we’re going to look at some ‘best case’ scenarios. And these returns can actually be more conservative than the stock market!
Here’s a 5% return, compounded every year, over 20 years:
OK – So with this, you’ve averaged just slightly under $2,000 per year.
WOW!! That’s over FORTY-FIVE THOUSAND dollars more – an extra $2000 per year vs. the 5% return!! Pretty cool, huh? Well, hold on…
Here’s 10%, compounded each year for 20 years:
Is this true??? Yes, it’s really true. You’re making nearly $100k more when you double your interest rate. THIS is BIG!
Ok, here we go, just for fun: 12% return, compounded over 20 years looks like this:
So with 12% compound interest, we see that there could be significant gains. And this is all very exciting stuff, to be sure. But we need to keep in mind that this is purely as an example of the potential of a 5%, 8%, 10% & 12% returns. Nothing in our lives is guaranteed, and this holds true for these types of returns. It seems as though we’ve seen many worst case scenarios lately, right? No need to go into that. But please go back to my earlier post, Information: The REAL Challenge of the Stock Market to see some facts about the performance over the last 10 and 20 years.
If we can see the market’s past performance, and truly see it for what it has been historically, and add to that another way to gain even a few more percentage points on our annualized return, we’re on our way out of the 5% doldrums, and up to the 8% wake-up call. If we’re really awake to other possibilities, we can see 9% or 10% returns with a huge amount of safety. YOU MUST SEARCH THESE OUT!
If my cousin’s planner was really on his game, if the market was not, if he was able to research, trade in-and-out of his positions, and really, really be on his game, then he might actually get a solid much more safe and conservative 8% return, year in and year out, for 20 years. He might be able to grow my cousin’s portfolio in a truly meaningful way. But he’s human and the stock market isn’t what it was. (Have you heard of High Frequency Trading? It’s just the beginning, people.)
I’m not here to bash. I’m not here to tell someone their biz is bad, or that they’re not performing a valid service. I AM here telling you that finding a more conservative way to maximize your return through diversification, and increasing your participation in YOUR portfolio is critical: nobody can make you rich except for you. Get to it!
Working with a planner? Getting a good return? Awesome! Answer this: What kind of impact would an extra 2 or 3 percent help your long-term goals? What can you do RIGHT NOW that will get you there?