It is commonly reported that the stock market averages about 10% per year return over the long term (decades). So the investor that buys and holds a diversified portfolio of stocks or mutual funds is led to believe that their portfolio will grow by 10% per year on average. You know the mantra, “Not to worry, I’m a long term investor. On average, I’m earning 10% per year.”

There is only one problem here. The facts, as you will see in a moment, state otherwise.

Let’s assume for a moment that an investor could match the stock market average return of 10% per year (not likely, by the way, as most professionals fall short of this goal). Further assume the market averages 10% per year over a four year period:

Year  -  Ac Size  -  YR  Return  -  Av Return  -  Av Return


0           $100,000

1           $  80,000            -20%                  -20%                -20%

2           $  72,000            -10%                  -15%                -14%

3           $  93,000            +30%                    0%                 -2%

4           $131,040            +40%                   10%                 +7%        

From the above example, you can see that our investor who managed to match the stock market performance year by year finished with an average portfolio return of only 7%, not 10%. Underperforming the stock market averages will always be the case, no matter what market period is selected - past, present, or future. So, can you expect to average 10% a year in a diversified portfolio of stocks and mutual funds (that you buy and hold) in a market that averages 10% per year? The answer is clearly, “No!”

This is one reason for considering alternative investments for a portion of your portfolio, such as a good trading system that provides superior returns in non-correlated markets.

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• Why Is The Macedonian Stock Exchange Unsuccessful?


• Using Sector Funds to Construct Diversified Mutual Fund Portfolios


• Buying Stocks and the Importance of Correct Timing


• Struggling Stocks, Booming Commodities


• How Covered Calls Turned a Trader Around


• The Shadow


• The Stock Market - Part 1: Believe It Or Not, Its Always Been Your Best Friend And Always Will Be


• Option Trading Basics


• Investing Basics - Stocks, Mutual Funds, Real Estate & Online Investing