The returns of 10-12% are historically reasonable rates that a long-term investor, in my opinion, might expect over a period of 30-45 years. Notice that I said "historically" reasonable and "might" expect. I wish I could look into the future and give you a 100%, no risk, guaranteed rate of return that you could count on, but that is obviously impossible. Stock charts give us a picture of the "past" and we then can make speculative projections on the future assuming that we will have an economy that continues in a similar growth pattern as the past.

Stock growth is nothing more than a reflection of the growth of the economy and the companies that make up the economy.  In some cases, it is nothing more than a relay race. One company replaces another (Wal-Mart picking up business that is being lost by K-mart is a prime current day example). Companies are monitored, added to and deleted from the major indexes (S&P 500 and NASDAQ) in order to keep the averages reflecting as true a picture of the broader market as possible.  

Small start-up companies typically grow very rapidly while larger companies tend to stabilize and default to a slower more stable pattern of growth.  In most cases, a well thought out mix of mutual funds that encompass both smaller capitalized companies (aggressive growth) with mutual funds that contain the larger capitalized companies (growth/growth and income) along with the added mix of an international fund (the Russian economy is booming and in the beginning of a great growth period) and a balanced fund (bonds and stocks) creates the diversity that gives safety and the best potential for growth with the least amount of risk.

Next, you must understand the risk/reward ratio. Risk/reward: The greater the risk, the greater the POTENTIAL is for reward. If we looked at a snapshot of history, we would see that the DOW-30 closed on 12/28/62 (approximately 45 years ago) at 651. On 12/28/2007, it closed at 13423, an average gain of 43% per year.

Though inflation has been tame recently, it has averaged 3.1% since 1926.  At that rate, $1 invested in large-cap stocks in 1926 would have grown to $266 after adjusting for inflation.  That equates to a gain of 10.67% before inflation or 7.57% after factoring in inflation. Will these returns continue? I don’t know? Can you use them for future projections? Why not?

If you go back to 1802 and track forward up until 1995 and divide the time span into blocks of 10 years (decades), you will find that there were only 5 decades that had an inflation adjusted average annual return of more than 10% (1860-1869, 15.73%; 1920-1929, 13.68%; 1950-1959, 18.23%; 1980-1989, 16.64%; 1990-1995, 13.00%).  If you take the S&P 500 index from its close early in January 1996 (616) to its close in early January 2002 you will see a 90% return over the period or an average annual return of 15%. As you can see timing is very important.

From 1995 to mid 2000 the stock market in general was in a tremendous bull run. Millionaires were being made annually. The attitude concerning wealth accumulation in the stock market was at an all time high. Everyone was making boat loads of money in the stock market (with only one real glitch coming in late 1998, but by years end, the market recovered to show a gain for 1998. After the NASDAQ broke 5,000 in March of 2000 a correction began.

In today's, downward trending market (bear market) it is hard to have an optimistic outlook mostly due to myopia. As I mentioned earlier, future stock return projections can only be based on actual past returns keeping in mind that the future will always be an uncertainty creating a situation of CERTAIN risk.  The acceptable risk/reward ratio (risk tolerance) must be determined by the individual investor. 

As John Paul Jones stated, "He who will not risk cannot win."  The individual investor is the only one that can decide on the level of risk they are willing to take.  As far as using 10-12% as a projected rate of return, based on relatively recent historical data, from 1940-1995 (55 years) the average annual percentage stock return (adjusted for inflation) has been 12.06%. 

I hope you can now see my justification for using 10-12% as a projected rate of return for the long term investor.  You must realize that it is only a projection based on historical returns and is obviously not without risk. I believe that an even greater risk than investing in the market is to not accept any risk at all.  Inflation is the silent killer when it comes to your money. 

The returns that I have mentioned above are for the major market averages.  I never recommend individual stocks as long-term investment options (see section on speculating), only mutual funds which contain hundreds and thousands of individual stocks.

After conducting a seminar to college students I was sent an email from a freshman attending the class that contained the following statement:  "If one was to actually maintain these high percentage yield investments (10-12%), one would have to be a professional stock broker who's entire profession is closely involved in studying and searching for good investments, or if not a stock broker, a person who dedicates great amounts of time to try and maintain the percentage yields you use."

My response began by referencing a point that I had eluded to in the seminar concerning the need for a responsible person desiring to gain financial independence and wealth to remain "focused and to think independently".  Below are my closing comments to this student, which apply to us all.

"You MUST take control of your financial future.  You are the only one that will be ultimately responsible for your success or failure.  You can't blame it on the stock market/bad investments, on the advice of your stockbroker or investment counselor, or on the information that you heard at some seminar.

I strongly disagree with your closing statement that I referenced above.  As I told you today, your greatest asset is TIME!  There is no excuse for you not to begin a self-study program to gain knowledge of the markets, business and the economy.  If any group I ever talk to has the ability to do that more, it should be the college student.  

I encourage you to become proactive immediately and start putting a workable plan together for the future.  Treat it as a part-time job.  Make it a goal to read at least one book each semester (other than course work) dealing with money management, investing, the stock market, or the economy.  You should attempt to read a business paper daily (if only the headlines) and watch a recap on the business day's news when possible.  As the saying goes, there are three types of people, 1) those that make things happen, 2) those that watch things happen, 3) those that wonder what happened.

Yes, the average person living in the American society is broke and yes, the average investor will trust someone else with the investment decisions concerning their money and will not realize the long-term returns that are possible.  Choose to be weird and become an independent thinker.  Learn to read the stock market and the cycles in business.  Learn and grow...steady and slow.

Start reading today.  The best book that I can recommend on learning to read and understand the stock market is Secrets for Profiting in Bull and Bear Markets, by Stan Weinstein (click to see Book List).  Read something by Harry S. Dent, Jr., for example, "The Roaring 2000s".  Harry Dent offers an optimistic outlook on the years ahead in the stock market.  It will give you perspective that is worth considering.  I am not 100% in agreement with Mr. Dent but his outlook is a good balance."

One last comment.  To realize exceptional rates of return relative to the average investor, you must become an "educated" investor.  How do you become an educated investor?  By taking the time to learn and increase your knowledge.  We live in the information age where there is an unlimited number of resources available at the touch of a computer key.  This website is a beginning.  Read every word and start exploring the many different links available.

When the stock market is going up the average investor buys, holds and prays.  When the stock is going down the average investor buys, holds, and loses money.  When the stock market is going sideways the average investor buys, holds and makes nothing.  In contrast, an educated investor learns that he must become both an investor and a trader (see Speculating/Trading).  As a stock trader you will learn that there is more than one strategy that can be used to make money in the stock market.  Learn to read the market and understand the economy.  Learn the difference between good advice and bad advice.  Become and independent thinker.  Reference my book recommendations (click here) and start your program of self study TODAY!