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Return on Investment
Old 05-07-2004, 06:24 PM   #1
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Return on Investment

I have a number of friends who have recently retired and use the same financial advisor. While playing golf the other day I was inquring how this guy does and one person told me, his financial advisor has stated that he thinks he can avergae approx. 12% return a year over a five year period with a diversified portfolio.

I guess being the skeptic that I am, this sounds almost to good to be true. What do the masses here think ?

Also what type of returns are you currently getting and what do you think you will do on average per year over the next five years ?
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Re: Return on Investment
Old 05-07-2004, 06:31 PM   #2
 
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Re: Return on Investment

It's too good to be true.

There are basically 2 numbers. The number you plan on and the number you get.

Plan on about 3% above inflation. This is the 'real' return. If you get 12% then you'll have a 'nice' problem.
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Re: Return on Investment
Old 05-07-2004, 10:27 PM   #3
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Re: Return on Investment

As a marketing expert, I believe I can shed some light on this statement.

The financial advisor may not have specifically noted WHICH 5 years he'd get 12% on.

Indeed, some experts say 3-3.5% after taxes and inflation, others say 6-9% before taxes and inflation. Pretty much the same thing, more or less.

Now...its possible that the advisor has planned to invest these folks into asset classes that typically return this result, and over a 30 year period classes like large value and small value can return 11.something% before taxes and inflation...but to suggest its even *likely* that you'll get 12% over the next 5 with most asset classes overpriced the way they are today...I'd rather try that "bet everything on the roulette spin" approach.

Best wishes to them...
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Re: Return on Investment
Old 05-08-2004, 09:13 AM   #4
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Re: Return on Investment

frayne
Quote:
I have a number of friends who have recently retired and use the same financial advisor. While playing golf the other day I was inquiring how this guy does and one person told me, his financial advisor has stated that he thinks he can average approx. 12% return a year over a five year period with a diversified portfolio.
IMHO, his financial adviser is telling the truth and he actually does think that he can average 12% (nominal) per year.

To explain this, I won't even talk about the difference between an average return and an annualized return. [An average return is bigger than the annualized return unless the return is exactly the same every year.] I don't think that the financial adviser is even aware of that point.

I think that the financial adviser has been taught by people who have limited their historical perspective to the recent past, perhaps from 1980 until today. Some investment classes such as today's REITS (not the disastrous first generation of REITS) only go back twenty years or so. If so, his entire historical perspective has been caught up in a massive bull market with a spectacular bubble that has not been deflated fully even today.

That is my impression. A financial adviser who mentions a 12% (nominal) return in today's markets is horribly misinformed.

Have fun.

John R.
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Re: Return on Investment
Old 05-08-2004, 05:22 PM   #5
 
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Re: Return on Investment

Average 12 % a year? When pigs fly.................

John Galt
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Re: Return on Investment
Old 05-10-2004, 04:59 AM   #6
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Re: Return on Investment

Being a Boglehead - his 6-9% ballpark is probably my guess also.

Dividend + GDP + average P/E change

1-2% = 5-6% + 'hopefully' no change

Unfotunately - P/E's are a 'tad' high historically on the S&P.
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Re: Return on Investment
Old 05-10-2004, 03:38 PM   #7
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Re: Return on Investment

If this "financial advisor" can guarantee 12% give him X amount of money and tell him that you will expect at least $X x .12 x 5 in 5years time. Ask him to put that in writing.

If he can only estimate 12% return, you can probably do as well with any no load index fund family.
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Re: Return on Investment
Old 05-10-2004, 06:25 PM   #8
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Re: Return on Investment

Quote:
...'hopefully' no change...
P/E ratios have been moving up for for the last century, but today's P/E is a bit ahead of the growth rate.
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