A 12% Annual Return for Long-Term Investing: Is It Realistic and Safe?

The concept of a 'safe return' often feels elusive in the world of investing. Returns do not offer safety in themselves; it is the investment itself and the manner in which it is managed that can provide safety. Currently, a 12% annual return is considered quite healthy. For example, investments in real estate can offer a return on investment (ROI) of around 12%, but it is crucial to understand the complexities involved.

Safety in Investments - An Ambiguous Concept

The term 'safe' is also relatively ambiguous in the world of investments. Just like the concept of God, both terms may exist, but let's avoid a religious argument and describe them in detail. The best you can expect from a 'safe' investment is that it is devoid of obvious risks that would likely cause the investment to fail. However, the 2008 financial crisis taught us that even "safe" investments can unexpectedly tank. For example, those who purchased Lehman Brothers stock in 2005 likely felt they were making a safe investment.

Defining 'Safe Investments'

In the investment world, 'safe' investments are usually considered to be those with low risk. An interest range on 'Investment Grade Bonds' is often cited as a benchmark for 'safer' investments. Anything with a higher return is often deemed unrealistic. Another yardstick is the average annual return of the SP 500 over the past 20 years, which captures economic downturns like the Dot Com crisis and the 2008 financial crisis, as well as the prosperity of the 2000s and the current market. This return percentage can be viewed as the upper limit for a longer-term, realistic 'safe return' in today's market.

Risk in Today's Market

All investments carry risk. In today's long-running bull market, the stock market may seem to offer returns that make a 12% annual return appear safe. However, risky bonds commonly known as high yield or junk bonds can achieve 12% returns, making them look like a bet on President Trump never tweeting again. It depends on who is managing the portfolio and how they minimize risk to achieve that return.

The quest for a 12% annual return does seem realistic in the context of long-term investing. Warren Buffet, often hailed as the greatest investor of our time, has achieved returns close to these numbers. This level of return is more feasible compared to the unrealistic promises often found online of 100% annual returns. Long-term investors should remember that while a 12% annual return is achievable, it does not make an investment risk-free.

Understanding the nuances of investments, setting realistic expectations, and working with a knowledgeable financial advisor can greatly influence the safety and success of long-term investments.