For anyone who is planning on living (in part or in whole) from their investment returns, it is important to set a realistic expectation of what those returns might be and to measure performance accordingly. For the past week, a survey has been running on The Motley Fool that asked this question:
“If you had to rely solely on your investment returns to live, what rate of annual return would you back yourself to deliver as a long-term average?”
The responses were:
- 58% of people said less than 10%
- 31% of people said 10-15%
- 4% of people said 16-20%
- 4% said over 20%
So what is realistic?
Well, a passive investor could expect currently to generate a ‘safe’ yield of around 4%, underpinned with capital growth that is broadly in line with the overall stock market. The readers of The Motley Fool are probably a little more active and better informed than the majority of private investors and yet more than half still felt less than 10% was a realistic overall investment return.
Is more than 10% realistic? My sense is that a private investor with the right tools, a solid strategy, basic investing skills, market awareness and self-discipline should be able to achieve more than 10% as a consistent, long-term average. At the higher end of the spectrum, I believe that consistently generating more than 20% requires significantly more investing acumen than most private investors have and certainly The Motley Fool survey confirms that most investors recognise this.
To reinforce the point, it is worth considering the type of investment returns that the very best investors have made:
John Lee (Lord Lee of Trafford) is often acclaimed as Britain’s first ISA millionaire and in his recent article in Investor’s Chronicle he declared a 48% return in 2013 (beating his previous best of 44% in 2003) compared to 24% in 2012. Of course, these figures do not include his worst years to provide a long-term average and John Lee himself talks about the impact that big losses can have on overall returns.
Another ISA millionaire, Leon Boros, in a recent article on Stockopedia, declared an annual return of 16.3% since 1993. He goes on to discuss how his GARP (Growth at a reasonable price) strategy has evolved into a QARP (Quality at a reasonable price) strategy and provides some excellent…
