Investing is like medicine. If you want to lose weight, any doctor can offer medically proven suggestions such as reducing calories and/or increasing exercise. If you want to grow your portfolio, over time, any professional can offer recommendations to help you by increasing your investments in the market and helping you remain invested when times are tough. But, neither doctors nor investment professionals can help everyone.
Imagine a man telling his doctor he wants to lose 30 pounds without exercise and to include a dozen donuts per day in his weight loss plan. You can imagine the doctor’s response. It is not possible to be healthy, lose weight, and consume a dozen donuts a day. Any doctor would immediately challenge the patients assumptions. If the patient doesn’t agree to exercise and dramatically reduce their donut habit, the doctor will, most probably, tell them not to anticipate losing weight.
In my opinion, investment professionals should do exactly the same thing. Some investors say they want an investment portfolio that will provide the growth they need for retirement but without any risks. They want growth with guaranteed principal. A few years ago, during my first meeting with a prospective investor, he said “I’d like an 18% annual rate of return with guaranteed principal”. To clarify, he added, “Oh, I don’t invest in the markets, too risky.” He was in his thirties! He wanted an impossibility, at least in the markets I’ve known since 1986. These days, a ten year treasury currently offers less than 2% annually. Eighteen percent annually isn’t realistic even with an aggressive portfolio.
In the diet and nutrition industry, there are those who profit from promising unrealistic results. You’ve seen the infomercials or advertisements for products that will help you lose weight without any work. Take this vitamin formula daily and you’ll lose two pounds a week! Or, why workout every day when our new meal replacement formula will burn calories while you sleep! If you’ve ever tried these products, you know they don’t work.
There are also those in the financial services industry who make unrealistic promises. How about, “Get the return of the market without the risks!”. If you attend one of the many evening seminars promoting this concept and choose to invest, you will not get the return of the market and you will have risks.
More space is required to fully cover this product, so anticipate a column dedicated to it in the next few weeks.
Remember there is no easy, guaranteed, path to wealth. Reaching investing goals, like maintaining physical health, requires work and may include risks.
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Exactly right. People have to have realistic expectations about risk and return. I have written an article on the 5 most important factors affecting the value of a portfolio for anyone interested at:
http://blog.arborinvestmentplanner.com/2011/07/increasing-value-of-a-portfolio-five-most-important-factors