When managed by a competent portfolio manager, what is the average rate of returns?

Question

If I begin investing, what is the average rate of returns will I get if I hire a competent portfolio manager to manage my investment? I've heard, long ago, that the average return on investment is around 12%. Is this true?

I am a bit confuse because when I look at bankrate.com, the average CD only give out 4.5% for a five year bond. I know stocks are different from CDs but can the difference be that much wide?

Anyways, if you do some investing or manage money, how much is the average return when you invest with an 'average risk'?

I'm new to all this so please share your insight.

Answer 1

There is no solid answer for this question.

The average rate of return is more around 10"ish" percent on the stock market, depending on your source. However, that's based of an indexing (buying essentially every stock on the market) instead of just buying in certain markets with the risk level that applies to you.

CD's are very low risk (and different from bonds as in your question). They are basically riskless (well a little bit, but very very little), but can face "re-investment" risk- that being if you "lock in" a cd rate that is good- but then inflation occurs, you rate is lower, AND if inflation is even higher once your CD reaches maturity, you might be stuck with worse (relative) rates then you had.

Anyways, average risk is also relative. First, how much are you investing (by that, what percentage of your total assets. Could you honestly watch your investment go down by 50 percent knowing that if you wait, it will grow by over 100 percent. THAT takes alot of hard liquor sometimes to deal with that :P)

Or diversify (always do this really). By that, go some high-risk areas (say small-cap growth stocks (though they are performing poorly right now), then get some large-cap value stocks (mutual funds), then some international, some bonds, a REIT maybe, etc... Talk to a broker about this- or buy a book on asset allocation.

Last but not least, the market is extremely high right now. In my honest opinion, it's TOO high. It can't go up anymore. "You can only climb a mountain to the peak, then you must go down". Not that I'm saying some stocks won't go up- they will. But at prices this high, compare how much higher the market can go to how much lower. Stocks scare me now.

Ok, last point: passive investing. This might be the best. In general, mutual fund managers CANNOT beat the S&P 500 in the long run (over many years). They might beat it some years, but they just CAN'T beat the index. So, from this point of view: you can buy a Index Fund, say Wilshire 5000 (5000 stocks of the S+P) and get a better return WITHOUT paying the sometimes high mutual fund fees. I'd seriously look at this option.

Feel free to email me if you want- though to be honest, I'm just a senior in college in finance- but I have a decent basic knowledge.
I am going to start my broker's license training in about 6 months.

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Answer 2

One long run study that I've seen says that stocks outperform treasury bills by about 5.5% over the long term. Which would say the expected yield is close to 10%. However, 10% is only an expected yield. It's not like you are going to see 10% every year. Some years will be much better, and some will be much worse than that. There can be long periods of time, even as much as a decade where you are earning nothing on stocks. Then there was 1930-1931 where stocks went down 31% and 44% in successive years. On the other hand, returns between 1981 and 2000 on average far exceeded the 10% average. The difference between the 4.5% on your money market fund and 10% offered by the stock market is to compensate you for the risk you are taking by buying stocks as opposed to the certain returns you'll get from a CD. If the market were to offer only 4.5% return, everybody would take the CD, as the return from the CD is certain, whereas the returns from the market are highly variable. It is the potential for higher returns that make it worthwhile to take on the additional risk that stock investments entail.

Your expected return is going to depend on how much risk you take. I don't know that there is such a thing as "average" risk...the more risk you take, the higher your expected return.

Answer 3

I believe that the long term return from the stock market is 8 or 9%. But that is not guaranteed. You might invest your money and lost 20% the first year. But if you leave your money in long enough, eventually you should average 8 or 9%. But the stock market has gone through long period of outperform (the 1990's) and long periods of underperformance (the 1970's).

Most money managers have a tough time outperforming the S & P 500. You can invest in this index through an ETF. An ETF or exchange traded fund is a mutual fund that trades like a stock. Vanguard Funds is a good first place to put your money.

I also like the website http://www.top10traders.com - this is a free site where you can see what the best traders are investing in. You can create your own portfolio of stocks with $100,000 in "play" money, and see how your investing ideas work out - or just takes ideas from the sites best traders. Good luck!

Answer 4

If you hire a portfolio manager he will take his cut right off the top 1% to 3% of your assets depending on how much he is managing, then he will invest your money in front end loaded mutual funds and get another cut from that. 5%. You will not make a thing for the first 2 years. After that, if he has done a decent job will will make about 8% annually over the long term, but remember your manager is skimming your assets at the rate of 1 to 3% annually whether you make anything or not.

Now you can save yourself the 1 to 3% and invest in mutual funds yourself or you can invest in index funds. In either case if you are reasonably careful, you should be able to make 10% annually over the long term. Some years you will do considerable better and some years you will actually loose money perhaps as much as 30 to 50% but over the long term you shoud make about 10% annually. A hired manager will not do as well for you because he is skimming your assets.

Answer 5

It is difficult to do averaging and comparing before you categorize portfolios. For instance, the average hedge fund equity portfolio with trading strategy (in and out) should offer the better return than the average mutual fund equity portfolio with buy and hold strategy; however, it is inappropriate to compare these two portfolios because of the different strategies and levels of risks.

If you are trying to find someone to manage your money, look for those who can consistently generate the returns you expect. Investing risks are tied to specific products (stocks, futures, or options), investing strategies and techniques, investing operations, etc. I would not worry too much about it. Those who consistently make money must have done something right to reduce the risks logically.

Answer 6

It depends on what the competent portfolio manager invests in. With large-cap stocks, you can indeed reach 12% in the long haul (long haul meaning 30 years or longer). But a stock-only portfolio is considered above-average risk. So if you want average risk, you have to water it down with bonds, which will decrease your expected return, but also dampen the risk.

Answer 7

going back to 1929 the market on average returns 7% above the rate of inflation but since Obama has been pres my portfolio has been doing great I hope this was of use