In the world of investing, promised high returns often come with high risks. There is no such thing as guaranteed 8% return on investments in the long run. While some investments may yield higher returns in the short term, managing risk through diversification is key for sustainable returns. This article explores common misconceptions about guaranteed returns and the importance of balancing risk and rewards.
”Guaranteed returns” in investment pitches should raise red flags
Investment products or opportunities that promote “guaranteed returns” should be viewed with skepticism. Typical returns on stock markets and other mainstream investments average 6-8% over the long term. Consistently generating higher returns usually involves taking on additional risk. Outsized returns may be achievable in the short run but risk blowing up an investment portfolio over longer periods.
Understanding risk is vital for long-term success in investing
While chasing maximum returns is tempting, sustainable investing requires balancing risk and rewards. Market volatility and drawdowns are normal, and no investment asset produces consistently high returns year after year. By diversifying across different assets and staying invested through ups and downs, investors can target reasonable returns while managing overall portfolio risk.
Alternative investments promising exceptional returns demand extensive due diligence
Investment opportunities outside public markets offering exceptionally high returns may seem enticing but require extensive vetting. These include private equity, venture capital, real estate partnerships, and other complex vehicles. Without proper due diligence, hidden risks could far outweigh any perceived returns over the long run. Tread carefully before allocating significant capital to exotic investments with uncertain track records.
Benchmark returns help anchor performance expectations to reality
Rather than fixate on hypothetical returns, investors should benchmark performance to relevant indices. For a diversified stock portfolio, compare returns to S&P 500. For a bond portfolio, look to Bloomberg US Aggregate Bond Index. While outperforming benchmarks should be the goal, significantly lagging them consistently likely indicates underlying issues with an investment strategy or process.
In investing, outsized guaranteed returns simply do not exist without commensurate risk. Savvy investors focus more on managing portfolio risk through diversification rather than chasing unsustainable returns. Benchmarks help ground return expectations while due diligence uncovers hidden risks.