101-02 What are your investing goals?

“There are no sure and easy paths to riches on Wall Street or anywhere else”

Benjamin Graham – The intelligent investor

Early on in the learning process, it is important to try to understand your goals for investing in the stock market.

There are a number of reasons to invest.

  • Using stocks as a supplement to other investments, to gain a higher overall return: This is a good and worthy goal but lacks quantification. What return do you need to make as a minimum?
  • Wanting to gain financial independence: How much money do you need to be free from the system.
  • Retiring early, how long until you retire?  Can your investments really speed this up?
  • Getting rich quick: This is a popular one, but almost impossible, except for those that are extremely dedicated and extremely lucky.
  • Beating the market:  A good choice, but what is beating the market?

Quantify your goals.

In investments, you do not know when your goal is achieved unless you put a number on it. But what should that number be?

The Minimum Goal

A popular statistic on the stock market reruns is as follows:

“The Stock Market makes 10% per year on average”. To beat the market you need to beat 10% per year, every year you are investing.

Well, let’s put this to the test on the Standard & Poor 500 (SP-500) index. What have been the typical stock market returns for the last 40 years, from 1970 to 2009?

S&P 500 Opening Price 2nd January 1970 = 92.06

S&P 500 Opening Price 2nd January 2009 = 931.80

This equals 6.5% per year annual gain.

We can also look at the Dow Jones Industrials (DJ-30), from January 1916, to January 2009. The figure was a 5% annual compounded gain.

So as a minimum, to beat the market we could say, you need to make at least 6.5% per year.

The Real Maximum Goal

So what is the realistic maximum? What do the best of the best achieve?

Warren Buffet – The Oracle of Omaha

Warren Buffet was the 2nd Richest man in the world according to Forbes in 2003 with an estimated net worth of $30 Billion. He is a self-made billionaire who made it all from investments in stocks of companies.

Annual Compound Rate of return of 24.7%

15 Excellent Warren Buffett Recommended Books

4 Steps to Build The Best Munger/Buffett Stock Screener

George Soros – The Man who broke the Bank of England

In 2003 rated by Forbes as the 38th richest man in the world, a self made billionaire with a net worth of $7 Billion.

Annual Compound Rate of return of 28.6%

So it would seem over the long-term if you can achieve a rate of return close to 25% you are doing extremely well, in fact, you are among the best of the best.

Putting it all in perspective

As you surf the web, you will be accosted by certain “Get Rich Quick” schemes, offering you amazing rates of return on your money. Typically these take the form of Hot Stocks Newsletters, Special Trading Systems, Personal “Rags to Riches” stories to touch your emotions, “and for only $50 per month, you too can learn to secret to unparalleled wealth”.

Do not believe the hype. Do not expect more than 25% per year, at the very most. Ask these people, if they are so successful, why are they not on the Forbes Rich List?