Investments – Text
Check unknown vocabulary before you read the text:
Peruse – to read; examine
Outlandish – bizzare
Boast – to show off
Unscrupulous – having no principles
No load fund – a mutual fund in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party.
Pie in the sky – something that looks very good but it is not possible to achieve
Sanity – normal powers of mind
Smooth – giving no problems
Volatile – tending to vary wildly
Leverage – investing with borrowed money as a way to amplify potential gains (at the risk of greater losses)
What Are Reasonable Investment Goals?
In perusing various advertisements for investments both on the web and in other places, you can become 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 regard 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 abovementioned 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"pie in the sky" investment promoters.
Historically, here are the approximate returns of various asset classes on a "buy & hold" basis. 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. 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% annually 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.