Average Rate of Return is Not What You Think [VIDEO]

What does it really mean to get a good “average rate of return” on your investments?

If you had an investment that was certain to get a 25 percent average rate of return over 4 years, does that sound good?

For example, let’s say you had a 100,000 dollar investment that gained 100 percent the first year in a boom market. Congratulations, now you have 200,000 dollars.

In Year 2, the market crashes, and you lose 50 percent. Your account balance is now back to 100,000 dollars.

Year 3, is a boom year again, and you earn 100 percent. Now the account is back up to 200,000 dollars.

In Year 4, the market crashes again, and you lose another 50 percent. The ending account balance is 100,000 dollars.

If you add up all those percentages and divide by the 4 years, you get an average rate of return of 25 percent over 4 years. Yet you’re right back where you started!

Sometimes average rate of return is not what it seems. Call Higher Ground Financial to learn more about this and other financial myths.

888-263-HGFG (888-263-4434)

 

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