Your Average Rate of Return is a LIE: Average vs. Actual Return

#investing #roi #averagereturn #investing101

Have you ever wondered why average rates of return get thrown around and advertised and then your portfolio doesn't seem to grow to the level you thought it would?

This is a little exercise I like to show people why your average rate of return is a lie. If you have 1 negative year or number in an average the numbers become skewed and inaccurate.

The only way to really achieve a true average rate of return is by never having a loss. You can achieve this in the case of indexing with certain caps and floors so you will never lose when the market goes down and only participate in the gains when it goes up. More on that in other videos.

What do you think of this exercise? Let me know in the comments! 💬

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[yoursafemoneypeople]

Did you know the difference between average and actual? Let me know your thoughts below 👇💬

[thatryanp]

My first professional job, the Vanguard rep came in to walk us through our 401k options. I should say, 'their 401k PRODUCTS'.
I knew it was a sales pitch, and I knew the hockey stick returns curve based on constant 8% return (average return, haha) was BS. But it's only 30 years later I'm finally learning what parts were salesmanship and what parts true.
Thanks for your work!

[marktapley]

The lesson here is to only invest in stock index or mutuals long term. Also do not invest in individual stocks unless you can afford to take big loses. Lots of people buy 5 stocks and one of them will take a big drop, ruining performance and losing a lot of money. If you have enough money to withstand market volatility and still not touch principle (limiting to maximum withdraw of 4%) even in a down market then you are probably going to be ok. If that is not case then look into an annuity even though you are most likely going to give up some returns over the long term. Good video James. Always concise and well explained.

[pennypingu]

Every time I watch one of your videos, you bring up concepts I had questions about in the back of my mind but never explored. People like to advertise the "average return" but the actual is the only thing that matters if you buy and hold. The videos you make present the concepts in a easy way to undertand. Thanks for helping my think logically about investing.

[madonnaprevite]

Wow, I was thinking about this last weekend and did an average vs actual rate of return for my investments and came to the same eye-opening conclusion. I didn't quite trust what I was seeing until just now when I watched your video with explanation. I am more confident with my results and understand better how avoiding losses should be more of a priority. Thanks!

[mobilegameplay]

Does this not miss the fact most people dollar cost average over the entire period? I would be interested to see real return on that. I would guess much higher

[financiallydisciplined]

There is so much misleading information in the financial world. Thanks for bringing this to our attention in a simple to understand manner 👏

[cavildie]

It's called 'geometric mean' the average "actual" return. The simple average calculation is the mistake the uninformed people do.