How can I determine if my rate of return is "good" for the market I am in?

Question

I am considering a small investment to get started with. What percent rate of return is considered to be good return on investments made in a stock market?

I read somewhere that 25-30% is considered very good but in today's economy I don't know how to expect such a return.

What sort of indicators should I be looking for to evaluate if my rate of return is better or worse than average for the market I am in? What is the best way to make that evaluation while considering my tolerance for risk? Is there a general formula or research site I can use?

Answer 1

A good way to measure the performance of your investments is over the long term.

25-30% returns are easy to get! It's not going to be 25-30% in a single year, though. You shouldn't expect more than about 4% real (inflation-adjusted) return per year, on average, over the long term, unless you have reason to believe that you're doing a better job of predicting the market than the intellectual and investment might of Wall Street - which is possible, but hard. (Pro tip: It's actually quite easy to outdo the market at large over the short term just by getting lucky or investing in risky assets in a good year. Earning this sort of return consistently over many years, though, is stupidly hard. Usually you'll wipe out your gains several years into the process, instead.)

The stock market fluctuates like crazy, which is why they tell you not to invest any money you're likely to need sooner than about 5 years out and you switch your portfolio from stocks to bonds as you approach and enter retirement.

The traditional benchmark for comparison, as others have mentioned, is the rate of return (including dividends) from the Standard and Poors 500 Index. These are large stable companies which make up the core of larger United States business. (Most people supplement these with some smaller companies and overseas companies as a part of the portfolio.)

Answer 2

A good measurement would be to compare to indexes. Basically a good way to measure yourself would be to ask "If I put my money somewhere else how much better or worse would I have done?"

Mutual funds and Hedge funds use the S&P 500 as a bench mark. Some funds actually wave their fee if they do not outperform the S&P or only take a fee on the portion that has outperformed the S&P 500.

in today's economy I don't know how to expect such a return

The economy is not a good benchmark on what to expect from the stock market. For example in 2009 by certain standards the economy was worse then today but in 2009 the market rallied a great deal so your returns should have reflected that.

You can use the S&P 500 as a quick reference to compare your returns (this is also considered the "standard" for a quick comparison). The way you compare your performance is also dependent on how you invest your money.

If you are outperforming the S&P 500 you are doing well. Many mutual funds DO NOT outperform the S&P 500.

Edit Additional Info:

Here is an article with more comprehensive information on how to gauge your performance. In the article is a link to a free tool from Morningstar.

Use the Right Benchmark to Accurately Measure Investment Performance

Answer 3

Do you recall where you read that 25% is considered very good? I graduated college in 1984 so that's when my own 'investing life' really began. Of the 29 years, 9 of them showed 25% to be not quite so good.

2013 32.42, 2009 27.11, 2003 28.72, 1998 28.73, 1997 33.67, 1995 38.02, 1991 30.95, 1989 32.00, 1985 32.24.

Of course this is only in hindsight, and the returns I list are for the S&P index. Even with these great 9 years, the CAGR (compound annual growth) of the S&P from 1985 till the end of 2013 was 11.32%

Most managed funds (i.e. mutual funds) do not match the S&P over time. Much has been written on how an individual investor's best approach is to simply find the lowest cost index and use a mix with bonds (government) to match their risk tolerance.

"my long term return is about S&P less .05%" sounds like I'm announcing that I'm doing worse than average. Yes, and proud of it. Most investors (85-95% depending on survey) lag by far more than this, many percent in fact)

Answer 4

First add the inflation, then minus your expenses for the year. If you are better than that, you have done "good".

For example: - 1.)You have $10,000 in 2014. 2.) You need $1,000 for your expenses in 2014, so you are left with $9000. 3.) Assuming the inflation rate is at 3 percent, the $10,000 that you initially had is worth $10,300 in 2015. 4.) Now, if you can get anything over 10,300 with the $9,000 that you have you are in a better position than you were last year i.e(10300-9000)/9000 - i.e 14.44%. So anything over 14.44 percent is good. Depending on where you live, living costs and inflation may vary, so please do the calculation accordingly since this is just an example.

Cheers