Your financial advisor states your portfolio, based on event driven investing, is performing well. She suggests implementing a 7% investment strategy. Unfamiliar with the concept, you inquire “what is the 7% investment rule?” Smiling, she pushes your paperwork aside, folds her hands, and tells you this …

What is the 7% Investment Rule?

The 7% investment rule is a benchmark for the average return of a long-term diversified equity (stocks) portfolio. The strategy is to construct a portfolio that averages a 7% annual return over a long-term horizon. The percentage real return is based on the historical average return of the US stock market, adjusted for inflation. A real return is an investment return adjusted for inflation and a nominal return does not account for inflation. To answer the question of what is the 7% investment rule? We should examine the strategy’s details:

Historical Returns – Historically, the US equity market has generated an annual return of 8.5% (Arithmetic mean) and 7% (Geometric mean) from 1870 to 2023. A general interpretation is the market has produced a nominal return between 7-10% over the century and a real return of approximately 7% per annum.

Compounding Impact – The compounding interest effect on a diversified portfolio averaging a long-term 7% return annually is the doubling of an investor’s portfolio value in 10.3 years.

Long-Term Horizon – The 7% investment rule is a long-term strategy. Short and medium-term return gyrations will occur; however, the long-term return average of 7% per annum remains the goal.

Diversification – To increase the probability of achieving the targeted average return, a well-diversified portfolio is required. A portfolio composed of an optimal balance of stocks, bonds, and index funds would be considered well diversified. Differing industries can add to the portfolio’s overall diversification.

Realistic Return Expectations – Implementation of this strategy sets realistic expectations. Inherently, the 7% investment rule is not designed to beat the market by a wide margin but to provide an investor with market-matching returns.

What is the 7% investment rule? It is a diversified portfolio investment strategy crafted to produce 7% average annual return over a long period of time. The strategy seeks to replicate the US equities market’s historical average return, adjusted for inflation.

What is Fidelity Special Situations Fund?

The Fidelity Special Situations Fund is a mutual fund. The fund is managed by Fidelity Investments, Inc. and looks to capitalize on undervalued securities exhibiting growth potential from special situations events. Here are the fund’s key aspects:

Investment Strategy – The fund identifies, analyzes, and invests in special situations such as mergers, acquisitions, restructurings, and spin-offs. The fund profits from the spread between the asset’s purchase price and its intrinsic value.

Portfolio Diversity – The fund’s portfolio is a blend of small, medium, and large cap (capitalization) securities stretched over a broad domestic and international industry spectrum.

Management Team – The Fidelity Special Situations Fund is managed by seasoned professionals that implement a bottom-up securities selection process predicated on company underlying fundamentals and catalysis-driven value realization.

Is 7% Annual Return Realistic?

A 7% annual return is realistic provided an investor realizes a few pertinent factors:

Volatility – Market volatility is inherent, and a 7% year-over-year is not a guarantee of a similar return every year. A long-term focus mitigates short-term jitters.

Diversification – Interested in improving your chances of achieving a long-term 7% return? Diversify across different asset classes, industries, and geographical regions. The potential reduction in risk will increase your probability of success.

Risk Profile – Implement a diverse risk profile. Varying the risk profile of investments in your portfolio provides an added layer of loss mitigation and an increased opportunity for long-term success.

Monitor and Adjust – Monitor your holdings regularly and adjust based on market climate changes.

What is the 7% investment rule? The 7% investment rule is a strategic benchmark that is achievable provided it is implemented over the long haul and an investor remembers that actual returns are influenced by investment choices, economic environment, and individual temperament.

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