Sivy on Stocks

Aiming for a realistic return
Setting reasonable goals increases your odds for long-term success
August 18, 2004: 10:11 AM EDT

Nobody wants to risk big losses - but everybody wants big profits. The key to successful investing is balancing risk against potential return. If you overreach, you could suffer a setback so crushing that you never fully recover. On the other hand, if you try to avoid all risk, you'll earn less than a fair return.

A 17-part series on how to achieve maximum returns for the right amount of risk. See all the lessons.

What should you be aiming for? The first place to look for guidance is the long-term historical record. Including dividends, the S&P 500 has provided a median return since 1926 of nearly 12 percent a year. Over various five- and 10-year stretches, those returns have usually averaged between 8 percent and 16 percent. The 20 percent-plus annual gains that occurred in the late 1990s are rare.

To reach your goals, you don't need to always shoot for spectacular returns. Individual investors can outpace the market with moderately above-average returns in good times, as long as they don't lose too much money in bad times.

The way to achieve that goal is to put together a diversified portfolio built around a large core of blue-chip growth stocks. Those are the shares of companies that have sales and market capitalizations of at least $4 billion, strong balance sheets and projected earnings and dividend growth that will support a total return averaging at least 12 percent a year. That core of growth stocks should be balanced by other choices, such as income investments.

CNN/Money provides a list of 70 blue-chip growth stocks, along with key data on them (see the Sivy 70 here). Put together a well-balanced portfolio of such stocks, and if you average at least 12 percent annually, you'll double your money every six years -- and multiply it 16-fold over the next 25 years.  Top of page

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