What Return is Reasonable?
While driving this week I heard a national advertisement from a man who began by criticizing the stock markets, then went on to say that his firm could get people a “reasonable rate of return” without any market risk. Throughout the short spot he used that same phrase several times, apparently insinuating that many of his listeners were unwisely seeking unreasonable rates of return in risky investments.
Some years ago a local business was offering investments in an oil drilling venture and promised in their printed brochures to pay 18-24% returns. In the brochure this company also referred to the stock market but in this case only to imply that traditional stock market returns were too low for savvy investors. So one could assume that according to them, it would take 18% for a return to be “reasonable.”
As I considered the use and meaning of this word “reasonable” somehow my mind drifted back to my days attending school at BYU. My family was living in Las Vegas and in those days we had a national speed limit of 55 MPH, which the government had determined to be “reasonable” for cross country travel. As a young man driving 400 miles to school I considered that speed anything but reasonable. It was so frustrating that I often said at the time that if they would just raise the limit to 70 MPH I would never complain, or speed again.
Highway speeds have gone back to the 70-80 MPH range, but I am no longer a college student with time on my hands. As a financial advisor with clients to visits in distant states, and responsibilities in the home office, our company plane travelling at 300 MPH has become a much more reasonable solution. So what is a reasonable speed? Is it 55, 75 or 300 MPH? It really depends on how fast you want (and need) to get somewhere and the cost benefit of the different options.
In the case of the advertiser on the radio I mentioned, I happen to know that the product he sells is likely to average between 1-3% return over time, with 3% being the highest possible based on its internal cap rates. Does that sound reasonable? The answer depends largely on what it is you want your money to do for you, and how long it has to do it. If earning less than inflation will still allow you to meet your goals then to you it may be reasonable.
How about going after an 18% return wildcatting for oil. Is that reasonable? If you are inclined towards high adventure and can absorb big losses, then maybe for you it would be.
I am a firm believer in obtaining a reasonable rate of return, but there is no universal answer for that number since it will be different for each individual. It must be a matter of considerable thought and planning, the purpose of which should not focus on the actual return, but the goal it sets out to accomplish.