After looking at all the investment solutions the industry is offering, all prospectuses and plans any financial institutions may offer, I realized a very sad truth about investing. Small investors cannot really hope getting steady two digits returns. In fact, they will be lucky if they get a +15% for one year. The worst part is that it is not the fault of the financial institutions. Small investors are usually not made to invest plain and simple.
Some of you are probably reading those lines thinking “well I’m a small investor and I made double digits returns more than once, what’s his problem?”. Bear with me for a few more lines and you will understand my thinking.
Small investors are fairly conservative in general. The problem is not that they do not want 10% returns every year. The problem lies within their deepest fear of loosing everything. They are usually not ready to take a -15% hit in order to get three consecutive years of +10% and more.
When you look at the S&P500 or the TSX over the past 50 years, you will find out that it seriously dropped a few times. This is exactly what small investors are afraid about. Since they have limited knowledge of the market, they tend to think that the market will drop down to 0 every time they see market fluctuations.
They will most likely sell everything when the market is at the lowest point or simply invest in more conservative investment solutions. Unfortunately, conservative portfolios will do 5% to 7% at best. On the other side, they should technically never show a negative 10% return.
I am writing this post for small investors that might have a plan done by a financial advisor with 10%,11%,12% projected annual return. If a financial advisor is predicting such high annual returns, ask him to show you the price history of his mutual funds. He is probably not lying to you, but he might not tell you about the market fluctuation within your investment horizon. You can go -20% and then +51% from one year to another and it still makes an average of 10% for two years. However, your heart may not survive the rollercoaster if you are a more conservative investor.
For those who are making good returns without a fortune, it could be related to your good financial knowledge or your high risk tolerance. Unfortunately, small investors usually lack both of them and this is why they turn to financial advisor to advise them.
I think it is actually to good thing to do. However, you should never follow one’s advice blindly. Ask question and be sure that you understand where you invest your money. This is the most important part about investing.
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