Still shooting for moon

What is it about individual investors who keep insisting that they can generate annual returns of 12 or 13 percent - safely - at a time when a 2-year CD barely gets you 1.5 percent? Well, history. Since 1926, U.S. stocks have earned an annual average of almost 10 percent, according to Ibbotson Associates, and it appears as if some investors refuse to believe it is any different now (despite the drubbings they've probably taken these last two years). Columnist Jason Zweig asks, "What are we smoking, and when will we stop?"

If your financial planner says he can earn you 6% annually, net-net-net [after inflation, fees and taxes], tell him you'll take it, right now, upfront. In fact, tell him you'll take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You've just offered him the functional equivalent of what Wall Street calls a total-return swap. Unless he's a fool or a crook, he probably will decline your offer. If he's honest, he should admit that he can't get sufficient returns to honor the swap. So make him explain what rate he would be willing to pay if he actually had to execute a total return swap with you. That's the number you both should use to estimate the returns on your portfolio.

More by Mark Lacter:
American-US Air settlement with DOJ includes small tweak at LAX
Socal housing market going nowhere fast
Amazon keeps pushing for faster L.A. delivery
Another rugged quarter for Tribune Co. papers
How does Stanford compete with the big boys?
Those awful infographics that promise to explain and only distort
Best to low-ball today's employment report
Further fallout from airport shootings
Crazy opening for Twitter*
Should Twitter be valued at $18 billion?
Recent stories:
Letter from Down Under: Welcome to the Homogenocene
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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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