How Much Money Stocks Can Make You

Everyone wants to make a killing in stocks, but nobody wants to take any risk. That’s the basic conflict at the heart of any investment process.

How much money stocks can make you in the real world is a known fact. If you consider one big firm’s forecast, however, the answer might shock you. Natixis, a global asset manager, believes that while investors expect 8.5% annually from stocks, their advisors believe 5.9% is more likely.

This pattern repeats around the world, to varying degrees. Most investors think they’ll make close to 10%, while their advisors see a number close to half that.

The difference is important. A $10,000 investment that earns 8.5% in three decades turns into $115,583. If the advisors are right, the number you get is just $55,831 — nearly 52% less money!

The usual investor response to a lower return is to increase risk. No pain, no gain, right? Frustrated investors tell themselves that it’s all about being patient. But a string of low-return years can lead to trouble.

First it’s market timing — trying to get in or out of the market based on earnings, headlines or a hunch. Then stock picking, trying to isolate the winners from the losers among thousands of choices.

Too often, stock picking just ups the pressure. Concentrating your money into a small number of stocks leads to obsessive market following and ever more distracting information. Emotions take over.

It’s for that reason that the “average investor” earned just 2.1% over the 20 years from 1996 to 2015, according to J.P. Morgan. Comparatively, the stock market index by itself returned 8.2%.

You might conclude from reading the above that investors aren’t wrong to expect 8% or more from their portfolios, given what the S&P 500 has done in the last 20 years.

Yet most people don’t invest in the S&P 500. Often they fear the volatility that comes from being 100% in stocks and instead own a mix of stocks and bonds.

How much money can stocks make?

Yet even a 60/40 mix of stocks and bonds returned 7.2% over the same period. Where do advisors come up with a number below 6%?

One explanation is that advisors think that stocks and bonds will return less in future years than they have in the past. They don’t know this, but it’s a currently popular sentiment among professional investment managers.

Another less charitable explanation is that the difference between 5.9% and 8.5% is mostly explained by advisors’ fees. Since many advisors charge their clients 2% or more for their advice and the work of underlying fund managers, it’s not surprising math.

How much money stocks can make is undisputed. How much money you leave in the hands of managers is the question mark. A portfolio of low-cost index funds, well managed by software, removes that question mark and creates a much clearer picture of how your money will grow.