What Are Reasonable Investment Goals?

In perusing various advertisements for investments both on the web and in other places, I have never ceased to be amazed by some of the outlandish claims made for investment performance. Claims of 100 to 200% a year on a continuing long term regular basis. One made by a well promoted individual in regards to a "rolling stocks" program, boasts of a 20% return per month! Such claims are ridiculous and unscrupulous. What are reasonable expectations for investors, and the returns that are possible for systematic traders based on historic facts? It is worth exploring these returns so that we can set reasonable money management goals.

Usually promoters of ridiculously high returns claim to "want to teach and share their secrets to the masses". The questions every skeptic should ask are, 1) If this is true then why doesn’t the promoter just start a "No Load" mutual fund using his system. If it is truly remarkable he would have the ability to attract BILLIONS of dollars of investment. 2) The so called "Rich & Wealthy" promoter has nothing else better to do than to sell $199.95 (and up!) training courses! To show how ridiculous some claims are, in the above mentioned case of the claim of 20% per month, an individual with just $10,000 would have over $31 TRILLION in just 10 years! This number represents more than 3 times the ENTIRE annual production of the United States economy! So please, save your pocketbook and your sanity by ignoring claims by investment "pie in the sky" promoters.

Historically here are the approximate returns of various asset classes on a "buy & hold" basis. I have used historic source data for stocks and bonds dating from 1926. In the case for Gold I used the $20 an ounce price for the commodity dating from 1900. I have used Real Estate Investment Trust total return indexes since 1972 for the real estate return. The annual results:

Large Cap Stocks 12%, Small Cap Stocks 13%, Equity REITs 12% , Bonds 6% , Physical Gold 2.75%

The next question that should be asked is whether or not systematic trading can add value to these returns. The answer is both yes and no. I have literally looked at 100s of trading systems over the years, including all the "classic ones" looking back at periods of 30 to 103 years. As a broad based conclusion, legitimate, working trading systems tended to reduce overall risk, lower draw downs and provide a "smoother" less volatile return. However the overall compound rate of return using systems was close to the returns for the "buy and hold" as quoted above. In the case of very "high beta" asset classes, i.e. the NDX 100, an increase of 3 to 4% annual above buy and hold is possible using legitimate trend following systematic programs . 

The addition of leverage, or additional volatility such as used here in the double leverage index mutual fund programs, can double the buy and hold returns but with double the inherent risk! There are no free lunches here, and  regular draw downs of 30% (even with defensive timing) were part of the process to  produce these returns that can range from 25 to 29% compounded annually. So this is NOT a vehicle for the weak stomached or those with any investment time horizon shorter than 10 years.

The conclusion of the matter is what the returns of 10,000 mutual funds, legions of Hedge Funds, and Commodity pools confirms is this….Well structured, disciplined, diversified programs can (over time) produce returns in the 10 to 16% range. Those individuals  with a very high risk tolerance and employing leverage can possibly reach for returns in the 20%+ range. It appears that the absolute "light speed limit" for a diversified systematic traded account (using leverage) , which would also include the risk and  possibility of a draw down that would take up to half of your investment, is 30% compounded annually . Please have skeptical and doubtful attitudes from any investment program that promotes long-term (10 to 15 years or longer) returns higher than any of the legitimate ones that you have read here in this article!


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Important Disclaimer:

The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. This document is prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.

The Lussenheide Investment Warrior Report does not advocate trading futures or options. Any mention of commodity futures contracts or options contracts and/or prices in this publication is for illustrative purposes only. This is not an endorsement or recommendation of any commodity futures market nor in margin trading. This is not an endorsement or recommendation of any option market. The risk of loss when trading futures and options is substantial. You can lose more than your original investment.

Any information contained in the Lussenheide Investment Warrior Report and any trading signals from Bill Lussenheide may contain statements that are the opinion of the author. The information and opinions contained in the market letter and signals are believed to be correct, however the information is not warranteed or guaranteed in any way. The subscriber may use the information provided at his or her own risk. No representation is being made that the information will produce trading profits. In no event shall Bill Lussenheide or his family , be held liable for any special, incidental, or consequential damages, whatsoever (including: without limitation, trading losses or any other losses incurred) arising from the use or inability to use the information contained in his  publications, or from delays or failures in the electronic delivery of the publications.