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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Rate of return on investments

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: We are friends with two of your clients who told us how well their investments did over the past few years. If you can match that performance for us, we would like to hire you as well.

A: Rate of return expectations for all of our clients, including your friends, are based on risk-adjusted market rates of return. Portfolio returns of more than 30% per year over the past two years are purely a matter of luck and should not be expected to continue. Rates of investment return in 2004 and 2005 were enhanced by a few stocks that more than doubled in a matter of months and investment real estate along the eastern shoreline and the Gulf coast that has increased at a ridiculously unsustainable rate. As a result of these events combined with the low rate of borrowing for margin accounts and real estate, a few leveraged investors were able to increase their net worth by 100% or more each of the past few years. This perfect combination of economic factors no longer exists. An investment adviser may help you achieve your financial goals working within the returns offered by the markets overall, but hiring an investment adviser because you heard about expect higher than average rates of return and want to match this performance is not a logical action. It is not possible, in our opinion, to set a strategy for achieving a 30% rate of portfolio return for 2006 in any market sector. The smarter strategy is to build a portfolio that enables you to be ready to take


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