Every investor has a target or expected return, whether they realize it or not. Behind goals like retiring at a certain age, paying for college, or buying a home is an implied rate of return that has to be earned over time.

In a perfect linear world, earning your target percentage every year would get you to your goals. Markets do not work that way, which is why naming a target rate of return—and understanding what it asks of you—is so important.

Over years of working with clients, one pattern has stood out: many investors have never deliberately chosen that target or defined how they will measure whether “it’s working.” We often meet people who have saved diligently for years but have never written down the return they are aiming for. They know what they hope their money will allow them to do, but not what that requires from their portfolio

When a target is not defined, the gap usually gets filled by default. Investors hire a professional, trust experience and credentials, and reasonably expect that “good” results will follow. The unspoken issue is that without a clear target tied to an investor’s goals and the number of years until the money is needed, someone else ends up defining what “good” looks like.

The Cost of Not Having a Target

The cost of not having a target rarely shows up as a sudden failure. Money is invested, accounts are managed and on the surface everything may seem fine.

The problem is that there is no way to judge how well the strategy is working. Without a target rate of return, there is nothing to compare results against. There is no feedback loop, no early warning and no signal that progress may be too slow. The risk is not a bad year. It is discovering—years later—that the strategy never had a chance to meet the goal in the first place.

Many investors reasonably assume that if they stay invested and markets behave over time, things will work out. That belief is comforting and allows them to focus on other parts of life instead of confronting questions that feel technical or uncomfortable. Avoidance rarely feels like avoidance—it feels like efficiency, one fewer complex decision—until the gap between where they are and where they want to go becomes too large to ignore.

Setting a target rate of return does not make investing more complicated; it makes it more honest. It shifts the process from guessing to knowing—not knowing the future, but knowing what the portfolio is aiming for and why. With a target in place, investors and advisors can look at where things stand and assess whether they are ahead or behind, instead of relying on general impressions or reassurance.

Return, Risk, and What You’re Paid to Tolerate

Once a target is set, a natural question arises: what defines a “good” year or a “bad” year? Is the calendar year even the best way to judge results?

For long‑term goals, focusing on single‑year outcomes can encourage overreactions—celebrating too much in a strong year or abandoning a sound strategy in a weak one. It is usually more useful to judge results over multi‑year stretches that line up with the plan, rather than grading every calendar year in isolation.

“A rate of return is not a promise; it is compensation.” Different investments exist because they ask different things of the investor—certainty, liquidity, patience, or emotional discipline. The return is what the market offers in exchange for those tradeoffs.

Some people prefer the certainty of savings or the predictability of recurring interest payments from bonds. That preference can provide peace of mind or “sleep at night” protection, even if the expected return is lower. Others are willing to tolerate bigger swings up and down in account value, or even very concentrated bets, in pursuit of potentially higher long‑term returns, as seen in entrepreneurs who have historically put most of their net worth into a single company.

High concentration runs counter to conventional investment wisdom, which emphasizes spreading risk across many holdings. Most investors do not need to—and should not—take that level of risk, but seeing the full spectrum helps clarify where an individual is truly comfortable.

One way to frame the tradeoffs is to look at broad categories of assets and the kinds of “payment” they historically* offered for different forms of discomfort:

• T‑Bills (~4%) Investors are compensated for giving up upside in exchange for liquidity and nominal certainty.

• Public stocks (~10%) Investors are compensated for enduring volatility—those big swings up and down—along with drawdowns and the stress of owning businesses through full cycles.

• Private equity (roughly 10.5–13%) Investors are compensated for illiquidity, leverage, manager risk, and limited transparency.

Seen this way, the question shifts from “What should I earn?” to “What am I being paid to tolerate, and for how long?” A reasonable target rate of return is not something to demand; it is something to align with, based on the number of years until the money is needed, tolerance for ups and downs, and the discipline required to stay invested during uncomfortable periods.

Even assets designed to preserve capital can lose ground over time once inflation, taxes and opportunity cost are considered. That is why a target must be grounded in real‑world tradeoffs, not wishful thinking.

How Mad River Thinks About Targets

As a Firm our approach accepts periods of volatility and declines in the pricing/market valuation of investments in pursuit of strong long-term outcomes. We evaluate those periods of volatility and decline by reviewing whether the reasons for our initial investment have negatively changed - if it has not - we let the investment play out. This approach most often has worked in our favor over more than three decades of investing. We run a concentrated portfolio of businesses we believe have durable long‑term value and hold them through full cycles rather than constantly switching strategies. Our own capital is invested in the same portfolio, and clients choose to invest alongside us.

Internally, we think in terms of roughly doubling capital over about seven to eight years*. This is not a forecast or a guarantee. It is a long-term framework we use to evaluate whether our strategy has done its job over a full cycle.

Because the portfolio itself does not change often, our work is less about redesigning holdings and more about helping investors decide whether our return objective, time horizon, and level of volatility fit the life they want to fund. We focus on compounding capital over meaningful multi‑year periods (at least 3-5 years) rather than chasing past performance or reacting to every short‑term market move.

Thinking in multi‑year stretches helps investors avoid getting overly excited in very strong markets or too discouraged in weak ones. The focus stays on whether our strategy is doing its job over time and whether it still matches an investor’s own target and tolerance for ups and downs, not on what happened in any single month or year.

If you would like to explore how this way of thinking about target returns fits your situation—what your capital needs to earn, over what time frame, and with what level of volatility—our team is always open to that conversation.

* Important General Investing Disclosure: Inherent in any investment is the potential for loss of capital, past performance is not indicative of future results, and the value of investments and the income derived from investments may increase or decrease. It is not our intention to state, indicate or imply that future investment results will be profitable or equal past results. The information presented is meant to form the basis of a discussion with us and is subject to further clarification and explanation during discussions with us. This information may not be duplicated, redistributed, or communicated to others without our consent. This is not an offer or solicitation to any person in any jurisdiction in which such an action is not authorized or to any person to whom it would be unlawful to make such an offer or solicitation. We do not provide tax or legal advice to our clients, and you are strongly urged to consult a tax or legal advisor regarding any potential investment strategy.

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