Each year Wall Street firms and investing websites roll out their predictions for the next year’s winners; predicting what stock or mutual fund to buy so you will be rolling in profits this time next year. The question is does anyone really know the best investments of 2012 – or any time frame – in advance?
One look at mutual fund returns for the past five and ten years tells a story that is the opposite of “best investments.” Comparing expected returns using financial planning or retirement planning calculators with actual returns give us a sobering look at what really happened to investors. The long term compound net of inflation return for the stock market (1871-2010) is 6.72%. Comparing this number with returns for the average mutual fund tells us what really happened to investors.
Real returns for the past five and ten years have left investors with very large shortfalls compared with the expected or anticpated growth. The lesson for astute investors is simple: No one really knows what future returns will be for any investment or fund. Smart investors plan for a wide variety of future scenarios, not just one.
The two best investments investors can make in any year are to become better educated on all of their investment options and to structure their portfolio so that you are not dependent on any one market for your returns. An educated investor, combined with a portfolio that uses the best of traditional and alternative investments, is a winning combination in any year.