“My financial planner gives me 20% yearly as an average rate of return”

“My financial planner gives me 20% yearly as an average rate of return”

I was looking forward to writing this article.
Because for me this is a very important topic and I love to laugh at the industry regarding it.

You know already if you have been following us since the start that we have created this website to sensitize you and to help you take control of your money.

If you still prefer to let someone manage your money, it’s fine but please take into consideration what I’m going to write about in this article.

 

First of all, let me ask you this: Would you like to invest your money with us?

“Ughh yes. I guess. Maybe? But what is your return?”

 

Well, my annual average return is 20%.

Are you good with that?

“I guess so.”

But let’s make an example that some if not all of the insurance and investment companies love to use. I can’t say that they use this on purpose but for sure some of us get bitten by the misguidance.

 

We did agree that 20% annually on average is a very good return.

So let’s put that in numbers.

 

Example 1

I start with $10 000.

-After year 1, I will then have $12 000

-After year 2, I will have $14 400

-After year 3, I will have $17 280

-After year 4, I will have $20 736

-After year 5, I will have $24 883

-And so on…

“My Financial Planner Gives Me 20% Yearly As An Average Rate Of Return” | Fortunate Trader in post

20% per year.

Very good right?

I’m comfortable with that. Are you?

 

Ok, let’s say it fluctuates a little. Since it’s AVERAGED it’s normal that it hasn’t been 20% every single year.

 

Example 2

I start with $10 000.

-Year 1 was 15%. I now have $11 500

-Year 2 was 20%. I now have $13 800

-Year 3 was 25%. I now have $17 250

-Year 4 was 15%. I now have $19 837

-Year 5 was 25%. I now have $24 797

 

So on average, I made 20% per year as a rate of return((15+20+25+15+25)/5years)

Still very good.

 

Perfect scenarios so far but the truth is that more than often this is what really happens.

 

Example 3

I start with $10 000.

-Year 1 was 97.5%. I now have $19 753

-Year 2 was -20%. I now have $15 802

-Year 3 was 25%. I now have $19 753

-Year 4 was 35%. I now have $26 666

-Year 5 was -25%. I now have $20 000

 

Will you agree that I made an average of 20% a year?

Balance after 5 years – Initial investment / number of years / Initial investment = 20%

($20 000 – 10 000) / 5 / $10 000 = 20%

 

But actually my balance after 5 years is showing otherwise.

Because my annual rate of return variates, my yearly balance is affected accordingly.

 

This example was still positive but let’s go over the “dark side” of what the marketing teams are advertising in the brochures.

 

Example 4

I start with $10 000.

-Year 1 was -50%. I have now $5 000

-Year 2 was -30%. I have now $3 500

-Year 3 was 60%. I have now $5 600

-Year 4 was 50%. I have now $8 400

-Year 5 was 70%. I have now $14 280

 

Will you still agree that I made an average rate of return of 20% a year?

(-50%+-30%+60%+50%+70%) / 5 = 20%

What did happen with my balance after 5 years?

Oups.

It narrowed, didn’t it?

But we still have an average rate of return of 20% per year!

 

The Truth is that it takes a way higher rate of return to get back to the balance you had before a loss.

“My Financial Planner Gives Me 20% Yearly As An Average Rate Of Return” | Fortunate Trader in post3Life is all about wording it.

Something can look very attractive but just by changing the way you say or present it, it can become way worst.

  • 20% a year
  • 20% on average as a rate of return
  • 20% per year as an average

“My Financial Planner Gives Me 20% Yearly As An Average Rate Of Return” | Fortunate Trader post2
Make sure you go over the brochure and look at the past information on a chart and not just in a sentence.

Don’t get fooled by the financial planner’s smile.

 

 

– Make It Happen –

MAG

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