Because someone is likely to come along and promise to give you exactly what you are asking for. If you believe that you need a 5% return on your fixed income portfolio, or a certain and consistent 12% annual increase in your equity portfolio, someone will come along and promise just that. Often, the promise will be supported by a hypothetical, back-tested performance model. The operative word is, “hypothetical.”
Any decision regarding investment advice should include a good measure of skepticism, along with a realistic understanding of what is feasible. If the 10-year treasury yield is bumping along at 2%, as it is currently, a promise of 5%, or more, is almost certain to either fail or include risks that may be far greater than you were expecting or find acceptable.
Similarly, it is evident that the stock market fluctuates, sometimes significantly. Under those circumstances, any promise of consistent, annual, double-digit returns should be viewed with considerable skepticism. While it is true that, over time, the S&P 500 has returned approximately 10%, this long-term growth rate has been interrupted by major market fluctuations.
It is human nature to look for the easy way out, yet the headlines frequently announce an investment scheme that promised unbelievably high returns and turned out to be a failure or even a fraud.
It is important for investors to understand what is feasible and then, “trust, but verify.” The harsher version, attributed to Harry Markopolos, one of the few people who were suspicious of Madoff’s operation, “assume fraud until genius is proven.”
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®