I recently received a question from a reader regarding mutual fund returns. He writes How can I expect to receive a 12% return on an investment when the market is bad?
The answer is... you cant!
Historically, the stock market (mutual funds) has returned about 11% over the past 70 years. While running a portfolio analysis, we generally use a 10-11% rate of return in our calculations. If you invest wisely and are able to achieve better than the average (12% or higher), your outlook will of course be better.
But what about bad years in the stock market like we saw beginning in 1999 and continuing through the early 2000s?
If you didnt have all of your money tied up in tech stocks, you may have seen small returns of just a few percentage points, or you likely lost money.
But if you were smart and realized that stocks were on sale, you would have stayed in the market and even bought more. In my personal portfolio, I saw small negative returns during this past down period. However, in 2006 my 401(k) returned 19.8%! This is of course how you receive a 10-12% average.
You must stay in the market in not only the good times, but also in the bad.
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Can you Earn 12%?