How to design a portfolio with 10% p.a. return?

[shorthair]

Hi

Is it posible to achieve 10% return p.a. via an investment portfolio?

If yes, how many percentage should be in the stock market, real estate, mutual fund, or any alternative investments?

Is borrowing for investment worth it? How do you leverage other people money to obtain profit? What are the risk that we need to look at?

Thank you in advance.

 

[Midpack]

History would say 10% is doable. For the future, I'd answer further, but I've misplaced my 10 foot pole...

 

[mathjak107]

10% is tough without alot of risk. 50/50 mix may get you 6-7% going forward from here.

 

[chinaco]

I would try to do it with index funds. Design the portfolio to manage the risk (diversified across equity classes and bonds) and rebalance periodically. IMO to do this, the amount in bonds is probably low to yield a 10% return (after expenses).

 

[mathjak107]

without lots of creative financing like what drove the great returns of the past markets stocks may average only single digit returns for quite a few years. that coupled with low bond yields will make any return above even 5% unless heavy heavy in stocks very hard to get.

 

[2B]

As a new member of the forum I'd suggest you start reading some of the suggested investment books on the Diehards Forum. Most of the forum members here will support this recommendation and be able to add some additional titles.

Investment Books

This will give you some insight in to the investment approach I think the majority of the forum members use (with variations). You will see that the "return" is really an outcome that can't be accurately predicted for any given year and the actual return will vary with market performance.

If what you are looking for is a "guaranteed" 10% return you will take a much higher risk than a conservative index based asset allocation. You can get over 10% in Canadian Oil Trusts and various closed end preferreds. The dividends look tempting but the asset values change dramatically over very short time periods. Some of these are probably ok but you'd have to have nerves of steel to make them the bulk of your portfolio.

Welcome to the forum and I hope we can help you learn about FIRE.

 

[Rich_by_the_Bay]

Is it posible to achieve 10% return p.a. via an investment portfolio?

How much time do you have? If you invest the total stock market, believe that past predicts future, and have about 20 years to invest, you stand a pretty good chance of 10%.

If not, you might still get lucky, guess well, and do OK. Or you could go broke.

 

[ziggy29]

Sure, it's possible. With reinvested dividends, the stock market has tended to return 10-11% during many periods in history. No one knows whether that will be true in the long term moving forward (a lot of permabears say not), but while past performance is no guarantee I think it's better than other anecdotal indicators.

The bigger question is as to whether or not you have the decades-long time horizon to make this more likely and less risky...and whether or not you can sleep at night through markets like we've had since the beginning of November. If you have the emotional response to want to "sell low" into tough markets and "buy high" into a raging bull, then investing may be hazardous to your wealth.

Personally, I'm at the point where I prefer a safer 7-8% with about 40% of my portfolio devoted to "non-traditional" equity assets. That includes real estate, precious metals funds, short-term bonds and a smidgen of cash. FWIW, I'm down about 6.3% YTD compared to -11.5% for the S&P 500. This portfolio isn't going to average 10%, but I no longer need it to. I made nice gains in the 1990s and from 2003-06 while doing a decent job of protecting assets in 2000-02. I'm able to take some risk off the table now. I'd rather minimize my chances of falling short of what I need than maximize my expected portfolio value (and increase the chances of failure).

 

[LOL!]

Read this: FundAdvice.com - The ultimate buy-and-hold strategy
This: FundAdvice.com - Fine tuning your asset allocation
and this: https://institutional.vanguard.com/iwe/pdf/portfolioconstruction.pdf (see Figure 2 in particular).

 

[shorthair]

I would try to do it with index funds. Design the portfolio to manage the risk (diversified across equity classes and bonds) and rebalance periodically. IMO to do this, the amount in bonds is probably low to yield a 10% return (after expenses).

How do you know when it is the time to rebalance it?
Is it when one mutual fund is doing well, you sell it and put the money into the one that are not doing well.

 

[ziggy29]

How do you know when it is the time to rebalance it?
Is it when one mutual fund is doing well, you sell it and put the money into the one that are not doing well.

Actually, yes -- that's exactly the idea. Rather than "guess" when it's time, though, you should have some fixed criteria that determines your move.

Say you have an 80/20 stock/bond allocation. Maybe after a certain period of time (perhaps 12-18 months), you sell some of one and buy some of the other to restore an 80/20 allocation. You sell the better-performing asset (locking in the gains) to buy some of the lower-performing assets. This sort of rebalance adds some "buy low/sell high" into your portfolio.

Alternatively, you could start with an 80/20 allocation and decide that if the 20% bond allocation falls to 15% or less (or rises to 25% or more), you rebalance back to 80/20.

 

[shorthair]

How much time do you have? If you invest the total stock market, believe that past predicts future, and have about 20 years to invest, you stand a pretty good chance of 10%.

If not, you might still get lucky, guess well, and do OK. Or you could go broke.

Yes, I still have about 20 years to invest. But I do not have many monies considering that I just started work 2 years ago.

Do you think it is worth investing in the stock market considering the current economic condition.

 

[ziggy29]

Do you think it is worth investing in the stock market considering the current economic condition.

"The current economic condition" is why the market is now on sale. Whether or not it will rebound soon -- or continue to fall -- remains to be seen.

One thing that IS sure, though, is that buying with the S&P below 1300 is a much better deal than buying it for over 1500 a few months ago.

Financial assets are among the few things that people tend to want to buy LESS of when they go on sale. If we were thinking about buying a big screen TV for $1500, wouldn't we be more likely to want to buy it if it fell to $1295? Yet drop the S&P from 1500 to 1295 and no one wants to buy stocks any more...

 

[shorthair]

Sure, it's possible. With reinvested dividends, the stock market has tended to return 10-11% during many periods in history. No one knows whether that will be true in the long term moving forward (a lot of permabears say not), but while past performance is no guarantee I think it's better than other anecdotal indicators.

The bigger question is as to whether or not you have the decades-long time horizon to make this more likely and less risky...and whether or not you can sleep at night through markets like we've had since the beginning of November. If you have the emotional response to want to "sell low" into tough markets and "buy high" into a raging bull, then investing may be hazardous to your wealth.

Personally, I'm at the point where I prefer a safer 7-8% with about 40% of my portfolio devoted to "non-traditional" equity assets. That includes real estate, precious metals funds, short-term bonds and a smidgen of cash. FWIW, I'm down about 6.3% YTD compared to -11.5% for the S&P 500. This portfolio isn't going to average 10%, but I no longer need it to. I made nice gains in the 1990s and from 2003-06 while doing a decent job of protecting assets in 2000-02. I'm able to take some risk off the table now. I'd rather minimize my chances of falling short of what I need than maximize my expected portfolio value (and increase the chances of failure).

I believe I can withstand the tough market. I have 50% of my fund in equity fund, 3.8% in balance fund, 2.5% in bond fund, 17.7% in Money Market Fund, 25.3% in Certificate of Deposit.

My mutual fund portfolio I diviersify it 25% concentrated on local equity fund, 6% global equity, others concentrate country on Asia.

The mutual fund prices depriciated 20% except for the money market where the price appreciated. I am a bit concern about my mutual fund investing. Most of the fund invested are newly launched less than 1 year. So, most of them does not have dividen yet.

 

[shorthair]

Hi

Thank you for all your replies as I am still a newbies.

Stock and real estate are areas that I have yet to touch.

The 80/20 stock/bond allocation, I will explore it once I start trading stocks. Is that to invest in bond, the best way to invest in a bond fund as purchase a single bond will cost up to million dollars?

Is all the companies listed in the dow jones are blue chip? How do we evaluated a big cap or small cap stock?

 

[kat]

The part I haven't figured out yet (too busy with other things) is sure good returns are important now, but I may have 60 years post ER. I have to look beyond now.

So I look to 10 or 20 or 30 years, but how careful/risk taking should I be about now and will that ever feel/be any different in future years?

kate

 

[shorthair]

Do fund prices matters as compare to the return in terms of dividen?

Thanks in advances.

 

[Rich_by_the_Bay]

Do you think it is worth investing in the stock market considering the current economic condition.

If you were in the market a new car that costs $30,000 and it went on sale for $20,000 it would be a good time to buy. Assuming you wouldn't feel too bad if it ultimately went down to $18,000 after you bought.

The points here are that you need to be in it for the long term, you can't time the market, and you need to stay diversified over a range of investments.

Take a look at the archives here on the board for recommended books on investing and retirement. Dollar cost averaging may be what you're looking for.

 

[HFWR]

Take a look at the archives here on the board for recommended books on investing and retirement.

What Rich said...

 

[Ed_The_Gypsy]

Like Rich said, there are conditions where you could expect to get ~10% pa over a period of many years.

Just don't expect to withdraw 10% pa over any length of time.

See LOL!s referenced articles.

 

[al_bundy]

vanguard sp500 index fund is just over 11% since it's inception in the 1970's

 

[shorthair]

Dollar cost average will take up a certain portion of my cash inflow. So far, I does not have dollar cost averaging in any single mutual fund because I fear that "What if the fund that I contribute monthly does not perform well in the long run?" It would be a huge cost involved. Moreover, every new purchase will incur service charge.

I will consider your suggestion on buying the index fund. Is ETF a more actively manage index fund?

Read investment articles are easy, understanding the investment theories are challenging, applying it effectively needs a lot of experiences.

 

[DblDoc]

Do fund prices matters as compare to the return in terms of dividen?

Thanks in advances.

By fund price do you mean load costs and expense fees? If so they matter alot. If you read the recommended books a recurring theme will be to avoid load funds and high expense ratio funds. Those costs drag your portfolios return and over long periods of time result in a huge difference in your portfolio balance.

DD

 

[RunningBum]

Dollar cost average will take up a certain portion of my cash inflow. So far, I does not have dollar cost averaging in any single mutual fund because I fear that "What if the fund that I contribute monthly does not perform well in the long run?" It would be a huge cost involved. Moreover, every new purchase will incur service charge.

I will consider your suggestion on buying the index fund. Is ETF a more actively manage index fund?

Read investment articles are easy, understanding the investment theories are challenging, applying it effectively needs a lot of experiences.

And trying to explain these things to someone without a basic understanding is even more difficult. When you ask about actively managed index funds, you're showing that you have a long way to go. How much reading have you actually done? You need to start with books before to get the full picture before you try to understand specific topics covered in articles, in my opinion, and as one of the first posters suggested.

 

[Rich_by_the_Bay]

Dollar cost average will take up a certain portion of my cash inflow. So far, I does not have dollar cost averaging in any single mutual fund because I fear that "What if the fund that I contribute monthly does not perform well in the long run?" It would be a huge cost involved. Moreover, every new purchase will incur service charge...Read investment articles are easy, understanding the investment theories are challenging, applying it effectively needs a lot of experiences.

You are making this much more complicated than you need to. Read Solin's book and Bogle's book. If you want simple you can do it with three funds (or even one balanced fund) and do as well or better than 90% of advisors do for their clients.

Sounds like your biggest source of concern is not understanding risk, volatility uncertainty, and the beneficial effects of holding an asset for a long time. Knowledge is reassuring in this discipline.