Many people new to investing expect larger returns than they actually receive and this can frustrate them. When they don’t earn 7-10% annual returns on their investments, they feel as though they have been cheated in some way. This is why so many people give up on investing after a few bad experiences. Exposing yourself to a more realistic view can help you appreciate the returns you will receive.
To get a more accurate picture, it’s important to question your investment advisor. When you’re told that a certain stock will earn you 5% annual returns, challenge the truth in that claim. How much is the annual fee charged by the investment advisor? Is there an internal fee associated with the stock? By the time fees are withdrawn, you may only earn 3.5% or less, so it’s important to ask about your net returns on the stock.
Additionally, investors can sometimes fall prey to a play on words. For instance, listen carefully to determine whether your investment advisor is guaranteeing a return “on” your investment or a return “of” your investment. If the latter is true, you likely won’t be earning much on your original investment.
Also, a prediction that you will double your money in 10 years with a $10,000 annual allowance provided after that decade should also be viewed with skepticism. When you take the time to do the math, you may find that the first 10 years of that annual payment will simply come from your initial investment. If you expected to double your money in that time, you may find that it will take considerably longer. It can take you 30 years to earn what you expected to make in just that first decade.
Investing can be profitable if you take the time to learn how your investments will perform under real-world conditions. As long as you prepare yourself with realistic expectations, you can benefit from the process. Discussing everything with your advisor can help, especially when you challenge him with the difficult questions.