Rate of Return Myth – mutual funds

RATE of RETURN MYTH on MUTUAL FUNDS

Average rate of return is math calculation.

Actual rate of return is a Money Calculation.

 Math is Math.  Money is Money.  MATH IS NOT MONEY.

Here is some information about average rates of return that may interest you, especially if you own mutual funds. After reviewing the illustration below, see what is reported to clients without dollar figures and how the Rate of Return of 25% is allowed to be reported to clients even though they really made a loss.

mutualfundmyths

Year 1 – invest $100,000  if you have $200,000 at end of the year you have a 100% rate of return

Year 2 – begin with $200,000 but end year with $100,000. Negative 50% rate of return

Year 3 – begin with $100,000 and end year with $200,000 means once again you have a 100% rate of return

Year 4 – begin with $200,000 and end year with $100,000 means loss of 50% You began with $100,000, 4 years later you end with $100,000. Wall Street Waltz will tell you this is a 25% return on your money.

How do they come up with that?

year 1 –   double your money  + 100%

year 2 –   halve your money     –     50%

year 3 –   double your money  + 100%

year 4 – halve your money        –    50% 100 – 50 = 50 + 100 = 150 – 50 = 100% 100% divided by 4 years = 25% rate of return

If you are not good at math or don’t understand calculations, you believe what they (the mutual fund managers) are telling you instead of seeing, I started with $100,000 and 4 years later I still have $100,000 so I have made 0% rate of return.

So in fact, if you calculate inflation and loss of opportunity for the growth of that $100,000 you actually lost money, not gained a 25% return.

On top of that you have paid a fee to the mutual fund manager so you actually have less than $100,000 now. They get paid whether you take a loss or not. Who is taking all the risk here?

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By using the formulas for calculating the average annual rate of return, we get a percentage that measures gains accurately over only a short period.

Whereas, the geometric or compound rate of return is a better yardstick to measure your investment over the long run.

The arithmetic mean or average return should be used to calculate return on investment only in the short-term.

Average annual return (arithmetic mean) = (Rate of Return for Year 1 + Rate of Return for Year 2) / 2 = (100% + (-50%)) / 2 = 25% (Arithmetic return = 25%)

Compound return (geometric mean) = (capital / return) ^ (1 / n) – 1 where n = number of years.

The formula is (100 / 100) ^ .5 – 1 = 0%. (Geometric return = 0%) from – http://library.thinkquest.org/3096/42analy2.htm

Mutual fund managers report the average annual rate of return (arithmetic) on the investments they manage.

As shown in the above example, the arithmetic return of the investment is 25%, even though the value of the investment is the same as it was two years ago. Thus, mutual fund reports are somewhat deceptive.

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Quite often managers will report in percentages without the dollar amount as did a manager in the scenerio below. We added in the dollar amounts to show you what really happened during a seven year period between 2000 and 2007.

The mfm who reported this to his clients focused on how great the 83% return was without the math showing that really 83% meant a 1.92% average return over 7 years.

mutualfundmyths2

Most people think that if they have a loss of 38% that to get back to where they were they only need to have a gain of 38%.

Problem with this is that the loss of 38% was from a high number of $100,000. The new number is now $62,000. So the gain has to be way may than 38% to get back to even, as can be seen on the illustration above.

What you should do is actually take your money out when it has doubled as then it is in your pocket and now you have really made a 100% rate of return.

There is a better way. Call me to learn more about it on 845-649-7487

I will ask you to submit this form and I will send you a booklet or cd for you to learn more about this system of banking where instead of dividing your money up (in essence uni-tasking your money) into separate functionalities like, some money will be in a retirement account 401(k), IRA or Roth IRS.

Some money will be in CD earning interest. Some money will be in 529 for kids education. Some money will be in a mutual fund for later on.

Some money will be in a savings account. Some money will be invested in stocks or bonds. Some money will pay off debts. etc. etc.

Our system has your money working for you in all the above areas at the same time with many more advantages as well, so paying off your debt can be increasing your retirement fund creating an emergency fund and earning you tax advantaged income all at the same time.

Sound too good to be true, or an impossible possibility? Why do you think you think that way? Because everyone has been trained to think about banking and investing in a way the big players want you to think. Instead of doing what the banks say it is time to start doing what the banks do.

Call me and I will be happy to show you how. Please leave me a comment on this post if you would like me to send you a booklet or a cd.

rate_of_returnThe Myth of Average Rate of Return is shown here by a 20% average return on $1,000 invested over two years.

The result could mean a $440 gain or a loss of everything.

 A Mutual Fund can legally, morally and ethically advertise

that they are getting an average  20% return for any of the scenario’s depicted below.

You MUST ask for the results in DOLLARS not PERCENTAGES. You want the Actual NOT Average Rate of Return.

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August 20, 2009 · Jennifer · One Comment
Tags: , , , ,  · Posted in: Mutual Fund Myths, RATE of RETURN

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