On the Web, you are Bombarded with “Get Rich Quick” Schemes, Offering you Amazing Rates of Return on your Money. But How Much Can You Really Make?
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?
How to Quantify your Profit 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 2018 = 2684
This equals a 6% per year annual gain.
We can also look at the Dow Jones Industrials (DJ-30), from January 1970, to January 2018. The figure was a 7% annual gain.
Interestingly the Nasdaq 100 Index has returned 15.5% per year over the last 33 years to January 2018, which makes it the best index to invest in.
So as a minimum, to beat the market we could say, you need to make at least 6% per year and at best 15.5%.
How Much Profit do the Best Stock Market Investors Make?
So what is the realistic maximum? What do the best of the best achieve?
Warren Buffett – The Oracle of Omaha’s Profits
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% Profit
George Soros – The Man who broke the Bank of England – Profits
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% Profit
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.
How Much Money can YOU Make in the Stock Market?
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 you too can learn to secret to unparalleled wealth”.
Do not believe the hype. Ask these people, if they are so successful, why are they not on the Forbes Rich List?
Do not expect more than 25% per year, at the very most.
A Real Example of Someone Trying to Sell me a Dream
I was called by phone back in 2009 by a gentleman who would not reveal how he got my details.
This is a true story of how the conversation unfolded.
Salesman: Hello Mr Moore?
Myself : Yes
Salesman: I was informed by a colleague of yours you might be interested in high growth investment opportunities.
Myself: Which Colleague?
Salesman: Err. Sorry my records do not contain the details, I think it is in another file (Alarm Bell Number 1)
Salesman: Do you invest currently Mr. Moore?
Myself: Yes I invest
Salesman: Well maybe you would be interested in an opportunity we have developed with the Brazilian government. We are buying land that will be made available for residential and commercial development in the next year, but we can buy the land at pre-approval prices. We have calculated a percent return to our select group of investors of 2000% in the next five year.
Myself: Really, (I say feigning interest and thinking to myself, this should be fun)
Myself: What is the risk?
Salesman: There is no risk Sir, we have a contract with the Brazilian government, and we simply need to make the investment. (Alarm Bell Number 2)
Myself: So you believe that if I put $50,000 into this investment, I will be a millionaire in 5 years?
Salesman: Yes, err, if that is 2000% yes.
Myself: So you will be able to return to me a yearly profit higher than that of the 2 best Investors that ever lived.
Salesman: Hung Up.