I was exploring some highly touted and "inexpensive" indexed funds on a top companies website. Over the last ten years it seems that they have some good returns. Unfortunately they ignore one simple math problem. They quote the average return over a time period NOT the actual return.
Most of their customers probably don’t know that any time a negative return or loss is posted, the average can be very mis-leading. Does anybody remember the losses of 2001 or 2008? Look at this simple example and see for yourself...
Assume you have $100,000 and you place it in an account that has a 50% loss in year one...how much do you have?
A: $100,000 X .50 = $50,000
Now assume that your account goes up 50% in year 2...how much do you have?
A: $50,000 X 1.5 = $75,000
Here’s where it gets misleading when the average is what companies use to induce their customers into buying or staying with them. The average return over the two year period is 0%. But when there is a negative or loss involved, the average will never be the actual return. In this case your actual return is -25% and an account value of $75,000. This is why companies don’t advertise actual returns.
Give us a call to get an illustration on “ACTUAL” returns and see how you can save for retirement without market losses.