Average Does Not Equal Actual

Average Rates of Return are often touted by financial experts, and yet simple math can show us that Average does not equal Actual.

Pretend that you invested $100,000 into a mutual fund that had promised an average rate of return of 25% if you left the money alone for 2 years. In the first year it earned 100%.

After the first year, the investment would look like this:

In the second year, the fund earned -50% (that is a negative 50%) and so now your investment looks like this:

While your funds average was 25% (that is mathematically correct, 100 + -50 / 2 = 25%) its actual yield was 0% because you ended up with only the $100,000 you started with.

So, Average does not equal Actual. If you’d prefer to invest your money in a place that does not roller coaster ride, please contact us and we can direct you to some options.

 

Please note the above illustration was for educational purposes only.

One Response

  1. Pingback: The Unfortunate Truth about Mutual Funds | Guide to Financial Peace

The best way to understand complex topics is through narratives.

PAYDOWN PERMISSION PROVEN PDF

Download the Paydown Permission PDF