For any investment strategy to work, you need to have realistic expectations of what can be accomplished. We would all love to have a 20% annual return with no exposure to risk, but markets don’t work that way. Still, we need a number to plug into some sort of model if we are to project our chances of meeting our long-term financial goals. We cannot base that number on wishful thinking or the spectacular (and mostly over reported) returns of hedge funds managing billions of dollars. We must project our own personal rate of return given what we can actually do in the real markets that we can access.
I’ve spent a lot of time trying to convince you that you can’t beat the market and that short-term predictions about direction and magnitude are folly (and I’m not done with that yet). This does not mean, however, that you need to beat the market. You can reach your financial goals by performing at the level of the market. Let’s also consider what we mean by “the market” when we talk about this. Many investors mean the S&P 500 Index when they talk about beating the market. We will dig deeper into the idea of risk management in the final chapter, but I want to make it clear that investing 100% of your retirement savings in stocks is imprudence in the extreme.