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Your questions answered: Investments #1

I recently sent out a survey asking folks to name one specific financial topic or issue that they'd like to hear or learn more about. (Note: If you'd like submit a topic or issue yourself, you can do so here.)

Generally speaking, the topics & issues I received fell into one of four categories:

1. Investments
2. Paying & Saving for College
3. Retirement
4. Budgeting

I'll be addressing all of these topics & issues here on the blog and I'll begin today by answering one of the most common investment questions I receive.

What's a reasonable rate of return a person should expect on an investment of average risk?

Rules of thumb give you something to compare your individual situation to. However, in my opinion, there isn't a correct answer to this question for the simple reason that everyone is different. For instance, what would you consider a “reasonable” return? How would you define “average” risk?

Your answers to these questions are unique and would likely be different from how your next door neighbor would answer these same questions. I'd be extremely cautious of anyone willing to rattle off a generic answer to your question without first asking you a number of additional questions about yourself. In my opinion, the only acceptable answer is, “There isn't one.

Perhaps a better question to ask is why are you focused on your rate of return? I'm guessing it is because you'd like your money to grow. And why would you like your money to grow? Is it some combination of wanting to be able to afford to send your kids to college, take that family vacation, and retire someday and maintain the lifestyle you've become accustomed to? Does that sound about right?

I often find that when someone asks me about risk & return, what they really want to know is...

What's the least amount of risk I can take that gives me the best chance of meeting & exceeding the goals I'd like to achieve & the lifestyle I'd like to maintain?

When you start by asking yourself the right question, it becomes easier to focus your time and attention on the important stuff (your goals & lifestyle) and then back into what the least amount of risk is that gives you the best chance of making it all happen. The lifestyle financial planning process not only helps answer this question for you, but it is built to adapt and adjust with you as your life changes.

While I didn't answer the initial question, I hope I've now given you a better question to start with.