For investors, large holdings do not always equal big returns
Personal finance Q&A with Steve Dinnen.
Q: I have always heard that if one invested over $100,000 that they should expect to get an annual return of between 8 and 10 percent. If this is correct, where does one invest to get that kind of return?
L.M., via e-mail
A: The amount of money you invest doesn't generally predict an expected rate of return. Rather, says Jeffrey R. Schulte, a chartered financial consultant in Plymouth Meeting, Pa., the specific investment category selected is the main determinant of return expectations.
Stocks have historically returned around 10 percent. But this is a long-term average, with significant variance from year to year.
In order to attempt to achieve a 10 percent return, an investor should build a well diversified portfolio across multiple asset classes. That would include stocks as well as bonds, both corporate and government issued.
A portfolio invested to achieve this growth rate, however, is susceptible to inherent risks, says Mr. Schulte. The 2008 economy is more than emblematic of the risks a growth investor faces. To help guard against these risks, a proportional allotment to the various global market segments will add diversification. In theory, when one segment declines another rises, thereby adding consistency to a portfolio.
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