is 4% growth in a SIPP realistic?

EasyAs123

Economic wrote: »

If there are four stocks A,B,C and D that have returns A,B and C +10% and D +50% then the average return in the market is +20%. If an investor randomly selects one stock then he has a 1/4 chance of choosing each stock so his expected return is 1/4*10%+1/4*10%+1/4*10%+1/4*50% is 20%. With probability 3/4 he will get a return of +10%, which is less than the market return of 20%, and with probability 1/4 he will get a return of +50%, which is greater than the market return of 20%. His expected return of 20% is the same as the market return of 20%. It really is basic probability, which is essential for any proper understanding of finance.

He can't ever expect 20% by only owning shares in one stock in the market you've given.

He has a 75% chance that his return from his random pick will be 10% (below the market) and only a 25% chance his return will be 50% (above the market)

His random selection would only ever match the market expectation at 20% if he bought a share all of the stocks on the market.

Therefore a random pick of a single stock has a greater chance of underperforming again the expected market return than a fund which selectively purchases across the market.

It really is basic probability, which is essential for any proper understanding of finance.

greatkingrat

It depends whether you are using the mean or the median.

The mean expected return is 20%
The median expected return is 10%

Prism

greatkingrat wrote: »

It depends whether you are using the mean or the median.

The mean expected return is 20%
The median expected return is 10%

Fair enough however for the individual investor that median is much more important than the mean which is more aimed at the market as a whole. Especially when we consider that over the long term only a tiny proportion of stocks make any return at all. The only way of capturing that return is to invest in the whole market, identify that small percentage of companies before anyone else, or be very lucky with a random punt