The eclectic investor’s performance target – relative or absolute?

The eclectic investor should measure themselves against an absolute performance target.  Most mutual funds measure themselves against a benchmark; usually the S&P 500 index (in the case of U.S. funds).   They do so because they are long only funds which means that they cannot short the market.  Usually they are fully invested.    In the eclectic investor’s case, they have several tools which allows them to invest long or short in a wide range of investment options.   They also don’t have to be fully invested all the time.   This allows them to make profits in any type of investment environments.   Hence, the eclectic investor should always be able to make money.

What should the absolute return target be?   Remember, savings should keep up with inflation.   Investments should outpace it.   This means that your objective, as an investor, is to beat the rate of inflation;   by how much is up to you.  It depends on your needs.  I would suggest beating inflation by at least 7%.  

The rule of 72 says that if you divide 72 by the return rate 7, it gives approximately 10.  This means that your purchasing power would double every 10 years.  Depending of how often you want  to double your money you may change the target return.   So, let’s assume that inflation averages 3% per year and your target spread is 7%.  Then your target rate should be 10%

Target Rage =  inflation + spread 

Target Rate  =   3%  + 7%

Target Rate = 10%   

Now that we have a target rate our objective is, first not to lose money and second to achieve your target rate of 10%.  Don’t worry about what the market is doing.  Just concentrate your efforts to average 10% per year over rolling three to five year period.   There will be ups and downs, but always strive to have a positive year. 

Now the question for you is: what is YOUR target return?

Have a profitable day!

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