I've heard some "market gurus" claim returns of up to 400% annually. Is this possible?

By Investopedia Staff AAA
A:

To answer your question in a word: No! Although we wish such a phenomenal investment system were real, the claims you speak of are preposterous. Most "gurus" are nothing more than salespeople trying to push a product that, despite what they say, does not work.

Anyone promising annual returns of more than 400% is one of two things: dishonest or extremely dumb. If these people truly had such a great system, do you think they would waste their time trying to sell it for four measly payments of $24.99?

Let's do some quick math. Say you had this secret formula and invested $1,000 into it. If it returned 400% for five years in a row, you would have $1,024,000 (through the magic of compounding). Before long, you'd be on Forbes' billionaire list, along with true market guru Warren Buffett. Clearly, anyone with a foolproof system providing such astronomical returns would not need to put on seminars or sell books for what would be pocket change.

The truth is that many systems out there base their historical performance on backtesting. In other words, they test obscure strategies on historical data, and then use the theoretical returns in their marketing copy. Other swindlers trying to sell you something may report short-term gains as annualized gains. For example, they may have made 25% in a stock over four weeks which, sustained over a whole year, is an annualized gain of roughly 325%. But the chances of anyone being able to maintain 25% returns every four weeks over several years are pretty much nil.

Like anything we try to learn, investing doesn't work by cutting corners. Remember that the power of compounding is most effective over the long term. And, as the old saying goes, if something sounds too good to be true, chances are, it is.

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