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  • Tom Grady

Setting expectations

Updated: Jul 15, 2019

Investing alone will not make you rich. Saving sensibly and investing well should give you a comfortable life but it will not make you as rich as Warren Buffet and that should not be your aim. Warren Buffet got rich through investing other people's money and leverage. Our goal should be to maintain and increase our purchasing power over time whilst minimising the risk of permanent capital loss.

So how should you think about returns? The economy in the western world typically grows low single digit % per year. Over the last 100 years the US stock market has grown by c8% annually albeit with some periods of significant annual volatility. Many companies have grown much more quickly than that but it is difficult to identify in advance. Amazon, for example, returned an incredible c38% annually between 1997 and 2019 but could any of us really be sure that it would have sustained the pace of growth that it actually has? That doesn't mean it's not possible to identify opportunities similar to that in advance just that's it's difficult. And rare.

A well diversified portfolio should be able to at least outgrow nominal GDP over the long term in which case you should expect returns of low to mid single digit. It's easy to dismiss this as not important but compounding small amounts over really does make a difference particularly when you consider inflation typically erodes the value of your savings at c2% to 3% per year

#returns #assetreturns

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