It depends on the risk involved. The US stock market has returned around 7% annually averaged over a very long period of time. That’s considered the benchmark for investments with significant risk.
this post was submitted on 30 Apr 2024
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True, but it's worth noting that this is an average and will vary wildly. Since I started tracking my annual returns have been 9.42%, 1.12%, 8.44%, 17.28%, -5.30%, 22.04%, 18.75%, 15.60%, -17.58%, and 18.11%. Which averages out to 7.75% — not far from the usual 7% figure.*
So for anyone just learning about investing, you'll almost never have an "average" year. Each year will be all over the place. It's only when you've been in the market for a long time that your returns will average out to something close to typical.
*I'm also ignoring an important distinction: IIRC the stock market averages close to 10% returns if you only look at dollar values. But when you account for the fact that inflation makes reach dollar worth less, on average returns are 7% in terms of real purchasing power. The returns I posted above are not inflation adjusted, but they include some bonds which don't return as much as stocks. So it's no surprise that my returns are on average less than 10%.
As with most things in life, it depends. Two people at different stages of life and career might evaluate the same investment drastically differently, against the criteria of their own priorities.
Years ago, I read the Bogleheads' Guide To Investing which thoroughly discussed, among other things:
- Why people pursue investments in the first place
- The juncture of: time, income, financial timelines, and financial priorities
- How doing almost nothing (index funds) can and does outperform active mutual funds; KISS
- Success criteria, aka not running out of money in retirement
Needless to say, most everyone would prefer a higher rate of return. But the caveat is how much it will cost. Some higher rates of return are almost without cost, such as switching from a brick-and-mortar savings account (0.01% APY) to an online savings account (~4.30% APY). This is almost a no-brainer.
Other investments have fantastic returns but have opportunity costs: buying into large infrastructure can pay huge dividends but take decades to become profitable, tying up the money and sometimes nearly bankrupting the Earl of Grantham. Even still, this could be advisable when viewed in the long-term.
Likewise, some investments have a paltry rate, but carry (almost) no risk of missed payments. Someone looking for a income later in life might be fairly pleased to have a steady stream of inflation-adjusted money.
Even corporations and governments evaluate investments differently than people, since corporeal legal entities aren't mortal and death is optional. Indeed, investment priorities are a lot different for sovereign entities, which cannot declare bankruptcy precisely because of their power to raise taxes.
I hope these examples show that the qualities of an investment -- independent of quantitative measures like return rate or revenue per share -- can be "good" in different ways.
Be careful when asking for financial advice on the internet. A lot of people treat investing like it's a casino.
Over a lifetime, 7% to 8% is a good return. If you are safely building a portfolio, and looking at year over year, then anything between 8% and 12% is pretty good. If you are closer to retirement or just more risk averse, then around 5% to 7%. Really, anything above inflation means you are making money.
Everyone is going to have different definitions of "good." It all depends on your goals, risk aversion, and stage of life. Your best bet is to find a financial advisor who can tailor a plan to your needs.
anything better than inflation
It depends on how long you are investing for.
Per year you need to beat the rate of inflation. If you don't at least match the rate of inflation you lost money. But four percent higher is pretty by good. Not based not great but pretty good
If you're beating USD inflation rate for holding cash then you're at least not losing money. Good returns can be anywhere from like 6-10% depending on the risk involved, but if you have a significant amount of capital to invest over a long term like years you can expect much higher for riskier ventures. The usual idea is start riskier when you're young with individual stocks, BTC, startup or small business ventures, etc; then gradually shift to lower risk index funds, utilities, CDs, bonds, retirement savings like 401k annuity pension etc low risk financial products as you get closer to a retirement goal.
The Sharpe ratio https://www.investopedia.com/terms/s/sharperatio.asp attempts to solve this exact problems. It basically uses how much your rate of returns vary to help you compare the risk of return to lower risk assets.
More, I suspect. But I ain't one of them so-called experts.
Anything at least 2 points higher than the best rate of return you are getting now.