 September 14, 2018
 Posted by: fortunatetrader
 Category: General
“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…
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.
Life 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
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