I have a friend who earns 14-18% a year.
They are earning 14%-18% the last few years because EVERYBODY has been earning 14%-18% the last few years. Hell, I have funds that did 50% last year and I've got a few holdings that have jumped up 40%-45% in the past 4 months! But this is the very definition of volatility. When it's good, it's very good. But when it's bad, it's very bad. My portfolio from 2003-present, my annualized return has been over 15%. During 2000-2002, I had losses of -1%, -3%, -15%. After you factor those years, that drops my 2000-present return to 6.6% a year! Think about those loss numbers -- I really only had 1 truly bad year. Basically, 1 year of market losses and 2 years of flat growth dropped my return from 15.4% annual to 6.6%.
Time to present another math lesson. What is your return if you have a 50% loss and a 50% gain? Using the arithmetic mean fomula, we have: ( -50% + 50% / 2 ) = 0%. So 0% gain, right? NO NO NO! The proper formula is the geometric mean: ( ( (1-50%) * (1+50%) ) ^ (1 / 2) ) - 1 = -13% loss. If you suffer a 50% loss, you need a 100% gain to recover back to your original value! The order does not matter either. A 100% gain will be wiped out by a 50% loss. That means for investments, losses have larger weightings than gains.
So when your friend talks about how they've earned 14%-18%, perhaps you should ask what his/her performance is after you include the 2000-2002 numbers. Here's what happened to the Total Stock Market:
* 2000 -10.57%
* 2001 -10.97%
* 2002 -20.96%
And the S&P500:
* 2000 -9.06%
* 2001 -11.89%
* 2002 -22.10%
37% losses for both indexes during this period. Doing the math, +14% yearly from 2003+ gets you barely above breakeven! 18% from 2003+? 3.8% yearly return.