How many times have you heard this statement or one like it to justify investing in the stock market? The statement is sometimes used to suggest that investing in the stock market will earn you a 10% return if you leave your money in long enough.
The problem with statements like this is that they are half-truths, often used out of context with beginning investors who dont understand the complete truths.
Problem OneThe first problem is the statement suggests that you should expect a 10% annual return from your investments in the stock market. Really? Which investments?
People unfamiliar with investing may assume that buying a few (or one) stocks will set them up for this famous 10% return. I know this is true, because they e-mail me all the time when it doesnt happen.
What Market?The second problem is what do they mean by the market? It wasnt the S&P 500 in 2004, because it didnt return 10%. You can buy mutual funds that track large portions of the market like the Russell 3000 or the Russell 5000, but they didnt perform any better.
The fact is that by investing in individual stocks you are not buying the market, so what the market does is of little concern to you.
Your focus is on the portfolio you create and how it will perform in the future, because thats all that matters. If you want to keep score by comparing your gains to those of some benchmark like the S&P 500, feel free to do so.
However, keep in mind investing is not about beating a benchmark. It is about securing your financial future. If the S&P 500 is up 2% and your portfolio is up 3%, that will be little comfort when you need real dollars to spend in your retirement.