QUESTION: What is the average rate of return when you make 100 percent on your money year-one, but then lose 50 percent in year two?
ANSWER: The investment industry will tell you 25 percent.
Wall Street has been using what I call this “fuzzy” math for at least 80 years! If you were to attend an annual meeting with your 401(k) investment adviser, they always use this fuzzy math to prove to you by numbers what you have averaged. These advisers will repeat, over and over again, that the average return in the market has been 11.9 percent over the last 40 years. Mathematically this is correct, this is how the numbers play out when you calculate them for yourself, which I have done. However, when you place your money in that stream of returns, you must take into consideration both the ups and downs. When y0u do, you will see that you will net 3.8 percent cash-on-cash. Go ahead, I urge you, to do the calculations for yourself and prove this out. If you feel like you have been lied to, join the club. While the math is correct that they use to advertise their products, this isn’t really how the money follows along.
Fuzzy math is deceptive because it does not tell the whole story. The argument for investing in the market is to keep ahead of inflation because you will “average” 11.9 percent, but there are so many other things to take into consideration besides this sparkly 11.9 percent figure. You need to be aware that placing your savings into the market is not always what you think it is. To learn more about honest methods for really putting money in motion to make a whole bunch more, contact me: firstname.lastname@example.org.
Clearing Up "Fuzzy Math" Used by Investment Market
Get in touch with Money Mastery®