Q: What is a good investment return to have each year?

The answer to this is that one should seek to achieve a sustainable amount of return based on their level of skill sets. So what do I mean by that?

For example if today I do not know anything about investing and I have set aside a sum of money that I do not need for the next few years, I would be better off by putting into a fixed deposit which generates say 1% a year, which I don’t think we can get it now at this current moment. But that’s just an example. I would still be better off than putting everything in my savings account.

Similarly for investing, some investors want to do it more passively and they can do so with an ETF like SPY which historically returns about 10% an annum. This is the expected return so far if you hold it for the long term. And you are going to do better than 90% of the other investors who try to stock pick or who are busy paying fees to advisers.

When this question is asked, I suppose the premise is that you are asking me perhaps as an active investor and wondering how much is considered good or bad performance by managing your own portfolio.

The purpose of investing actively by picking your own stocks, is only for the reason that that’s because you believe you can beat the index of the market you are invested in. Thus for example let’s say in the US, you rather not be vested in the leading 500 companies as decided by the index, you pick your own say 10-20 stocks. A fair measure would be then to see how your portfolio has performed in relation to the benchmark. 

If let’s say this year, the benchmark, S&P 500, makes 15%, but your portfolio makes 10%, you are considered underperforming the index. You would be better off by not picking your brains and just buying the index. If on the other hand S&P 500 makes 5% whereas you are up by 10%, it means there is alpha in your portfolio and that you value add to your portfolio by actively picking out the stocks. Which leads me to the conclusion, a good investment return for an active investor, is one that outperforms the index against which he is invested for most of his core holdings. If the S&P 500 is down 5% but if his portfolio is unchanged, I would say that he is still doing fine.

Performance can only be measured relatively and not always in absolute numbers. Black swan or tail risk events are bound to happen from time to time and when the portfolio crashes because of that, it doesn’t mean that you are performing poorly. It is a given when you are already in the stock markets. 

However, what is also important is that your core holdings are fundamentally sound and that you are invested in a good market. Otherwise even if you beat the benchmark over the long term, the absolute returns are probably still dismal.