Personal finance doesn't work without investments.
Investments don't work without returns.
For most of us, we defer our wants and sometimes our needs in order to save for the future. But we don't just save; we invest in hopes of a return.
But then it can get a little boring.
Your brother-in-law brags about how high his returns are. Your coworker whispers that she is making huge profits in some investment you don't even understand. Then you are in line at the grocery store, and the headlines on some financial magazine promise higher returns. Of course the background is a couple sipping champagne on a yacht.
That is not the life you are living. Very few are living that life. Most of those who can afford the yacht know better than to buy one.
Those people on the yacht are just models at a photo shoot.
So what do you do?
You follow the same concept as in your personal life. Personal finance follows the same principles. You can't outperform everyone all the time. There isn't some secret formula that you can buy for $19.99 plus shipping. Everything that goes up too far will come down.
It all reverts to the mean at some point.
So what is the mean? A traditional meausure of the US stock market is the S & P 500, which represents the 500 largest and most well known companies in the US. For a variety of reasons the S & P 500 is a bellweather for the US economy. And many investment companies offer index funds which seek to mirror the performance of the S & P 500. It's a good place to start.
Since its inception in 1957 this index has returned 10-12% annually. But it's been a bumpy ride. Most investors didn't make those returns because of frequent trading: getting out when the market drops, waiting till it rises again before getting back in.
So should you expect 10% a year over a ten-year period by investing in US stocks? That sounds more reasonable.
Some well diversified investments have returned much less than that.
So what would it take to make 20% a year? That surely would make your retirement a lot nicer. But it would take a lot of risk. Swinging for the fences also includes a lot of striking out. Last year's mutual fund star may be out next year - right after investors decided to buy. Chasing performance is a recipe for investment volatility and usually losses.
Contentment is the key.
Decide on how much risk you are comfortable to take. Then measure what kind of return to normally expect for that amount of risk. Then don't check your returns every day, or even every week. Once a month is better, but once a quarter is even better.
Stay on track, don't look back, and live your life.
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