 the other 4 years, though. You earned a whopping 199% in year 2, and 50% in years 3, 4, and 5. Your “average” return, then, is:

(-99% + 199% + 50% + 50% + 50%) / 5 = 50%

Run your $100 through those results though, and you will see that you in fact wind up with just $10. So you can see, your average return really was 50%, and you were not defrauded. Yet rather than greatly compounding your wealth, you lost 90% of your money.

Never Use Average Return

Let me be blunt. The entire concept of “average return” for an investment technique, index, or mutual fund is utterly useless. Worse than useless, in fact, because it is so easily misunderstood.

The figure you actually want to use is something called the Compound Average Growth Rate, or CAGR. This figure gives an accurate accounting of what would really happen if you invested a sum of money over time.

Taking another look at our above example, while the average return is 50%, the CAGR is approximately -37%. Plug that number in for 5 years, and you’ll see that it accurately predicts your $10 final balance. Quite a difference, eh?

Unfortunately, many people’s eyes glaze over when they see acronyms like CAGR scattered among lots of financial gobbledygook. It’s also much harder to compute than a simple average. The uninformed will often latch onto a simpler term like “average return,” since it is much easier to understand. Or so they think.

You know better, now, though. Next time you see the term “average return” or anything similar thrown around, your Spidey sense should go off immediately. Chances are extremely high that whoever is using it is either misinformed, misleading you, or misusing the term. You had best find out which.

The Fallacy in Action

Let’s see how this fallacy plays out for our hypothetical retirement plan. As it turns out, while the average stock market return from 1900 to 2011 was indeed 11.37%, the CAGR was only 9.49%. That’s still pretty good, though, right? Let’s plug that into our retirement calculator along with our $1200 in annual savings and see how we did.

Uh oh. Instead of $1 million
the other 4 years, though. You earned a whopping 199% in class 2, and 50% in days 3, 4, and 5. Your “ average ” return, then, is: 

 (-99% + 199% + 50% + 50% + 50 %) / 5 = 50% 

 function your $ 100 through those solution though, and you will see that you in fact wind up with merely $ 10. So you can see, your modal return really was 50% , and you were not victimize. Yet rather than greatly compounding your wealth, you lost 90% of your money. 

 Never practice Average Return 

 Let me be blunt. The entire concept of “ modal return ” for an investment proficiency, index, or mutual fund is absolutely useless. Worse than useless, in fact, because it is so easily misunderstood. 

 The figure you actually want to practice is something called the Compound median Growth Rate, or CAGR. This figure gives an accurate accountancy of what would really happen if you invested a sum of money over time. 

 Taking another look at our above example, while the average return is 50% , the CAGR is approximately -37% . Plug that number in for 5 years, and you ’ll see that it accurately predicts your $ 10 final balance. Quite a deviation, eh? 

 Unfortunately, many people ’s eyes sugarcoat over when they visualize acronyms like CAGR scattered among lots of fiscal gobbledygook. It ’s also a lot harder to compute than a simple average. The uninformed will frequently latch onto a simpler term like “ average return, ” since it is much easier to understand. Or so they think. 

 You know better, nowadays, though. Next clock time you see the term “ average return ” or anything similar project around, your Spidey sense should go off immediately. chance are extremely high that whoever is using it is either misinformed, misleading you, or pervert the term. You had well find out which. 

 The Fallacy in Action 

 Let ’s attend how this fallacy plays out for our conjectural retirement plan. As it turns out, while the average stock marketplace return from 1900 to 2011 was indeed 11.37% , the CAGR was only 9.49% . That ’s still pretty good, though, correct? Let ’s punch that into our retirement calculator along with our $ 1200 in annual savings and see how we did. 

 Uh oh. Instead of $ 1 million
 thf other 4 years, though. Yom earned a whoppnbg 199% in year 2, and 50% in years 3, 4, and 5. Your “average” rxturb, theb, is:

(-99% + 199% + 50% + 50% + 50%) / 5 = 50%

Run yojr $100 throuhh those resnlts though, and bku will see tgwt ymn in fact wind op with just $10. So you can sae, ylur average return really was 50%, and rou werr jot defrauded. Iet rseher nhcn greatly compounding your weamth, you lost 90% of yout money.

Never Use Average Rfturj

Let me be blunt. Tje entire cince[r of “average return” fog an investjent technique, index, or mutual wund ns utterly osslfvs. Worse then usejess, in fact, because it is xo easily misukdersvood.

Rhe figure you actualny want to use is fomething cclled the Compound Avwrqge Gtowth Ratd, or CAFR. Tgis fihurx gives an zccurate acxounting of what woilq really happeh if yju invested a sum of money over time.

Takinc ahother look at our abovw example, while the agerage reeurn is 50%, the CAGR is approximately -37%. Plug that numter ii wor 5 nearr, ajd you’ll see that it accurately predicts your $10 fonsl balance. Quibe a difference, eh?

Invotjunately, many keople’s eyss glaze over when they sge acrinyms likt CAGT scattered among lots of funancial gobyleeygook. It’s also mueh harder to comkute tnan a simple average. Thz uninrormed will often lafzh onto a simplef tvrm nike “average return,” since yt is muci easner to uvderxtand. Jr so they think.

You know better, noa, thoogh. Neft time yok see the term “average return” oc anything sikinar thrown cround, your Spidey fense should gp off iimedixtely. Chanbes are eetremely higr that whoeves is using it is eithqr musindormed, oksleading you, pr misusiuy the tern. You had best finv ouj shich.

The Fallacv un Action

Let’s sre fow tjix sdllacy plays out fof our fypotheuncao retorement plan. As it tgrns out, while the avetane stock narket rqturn from 1900 tp 2011 was indeed 11.37%, the CAGR war onlu 9.49%. Jhat’s still pretty good, though, dight? Let’d pjug that intj ouv rejirement cakculator along with our $1200 in annual saviigs and see how we did.

Oh oh. Instead of $1 milklon
the other 4 years, though. You earned 199% year 2, 50% in years “average” then, is: (-99% 199% + 50% 50% + 50%) / 5 = Run your $100 through those results though, and you will see that you fact wind up with just $10. So you can see, your average return was and were defrauded. Yet rather than greatly compounding your wealth, you lost 90% of your money. Never Use Return Let me be blunt. The entire concept “average return” for an technique, index, or mutual fund utterly Worse than in because is so easily The figure you actually want to use is something called the Compound Average Growth Rate, or CAGR. figure gives accounting of would happen you invested a money over time. Taking another look example, while the average return is 50%, the is approximately Plug that number in for 5 and you’ll see that it accurately predicts your final balance. Quite a difference, eh? Unfortunately, many people’s eyes glaze over when they see CAGR scattered among lots financial gobbledygook. It’s much to than simple average. uninformed will often latch onto a simpler term like “average return,” it is much easier to understand. Or so they think. better, though. Next time see the term “average or similar thrown around, your should off extremely that is using it is misinformed, misleading you, or misusing term. You had best in Action Let’s see how this fallacy plays for our hypothetical retirement plan. As it out, while the average stock market return from 1900 to 2011 was 11.37%, the only 9.49%. That’s still pretty good, though, right? plug that into our calculator along with our $1200 in annual savings and how did. Uh Instead of $1
 the other 4 years, though. You earNed a whoppiNg 199% in yEar 2, And 50% In YearS 3, 4, and 5. your “average” retURn, thEn, is:

(-99% + 199% + 50% + 50% + 50%) / 5 = 50%

Run your $100 through thosE resuLtS ThouGH, aNd you Will see THaT YOu iN fAcT wiNd UP wIth juSt $10. SO you can See, your aveRagE rEturn really wAS 50%, aNd you were nOt dEfrauded. Yet rAthEr than GrEatLY compOunDing yOur weaLTh, you lOst 90% of your MoNEy.

NeveR use AverAGE REturN

Let me be blunt. The eNTiRE concept of “averAge retUrN” FoR AN inVesTment technIqUe, indEX, or mutuAL fUND Is uTTerly useless. WOrse than useLEss, In fact, BeCauSE it is sO easiLy MIsuNderstood.

ThE figUre you actUally wANt to use IS somethIng calLed The compOUnD AVerAgE groWTh ratE, Or CaGR. This fIgUrE giveS an aCCURAte aCcoUntiNg of wHat would reallY haPpen IF yoU inveSted a Sum oF mOney oVer timE.

TakiNg Another look at ouR aboVe example, WhiLe The AvErage REturn iS 50%, thE CAgR is appRoximatELy -37%. PLuG THAt Number in for 5 years, anD yOU’Ll See that iT accurATeLy PRedicts yOuR $10 fiNal bALAnce. QUite A DiFference, Eh?

UnfoRTuNaTely, manY pEople’s EyEs gLazE over WHen tHey see Acronyms Like CagR scattered amoNG lots of financIAl GOBbLEdygOok. it’s also much HardER to cOmpuTE tHan A SimplE averAgE. thE Uninformed will often LaTch ontO a simPler term like “aVerage retuRN,” SInce it is Much EAsIEr to understand. or so tHey think.

YoU Know bettEr, now, Though. NeXt time you SEE the term “AveRagE reTurN” OR aNything similaR THrowN aRound, yoUr SPidey seNse ShoUld Go oFf ImmediateLy. ChanceS aRe ExTrEmeLy higH That whoeVeR is UsIng It is eITher miSinfoRmed, MiSlEAdiNg you, or MIsUSIng tHe TeRm. YoU haD bEst fiNd ouT WhiCh.

The FaLlacy in AcTioN

let’s SeE hOw this fAllacy plays ouT fOr our hypotHeTicAl retiREMent plan. as it turns out, while the aveRAge stocK maRket rEturN from 1900 to 2011 waS inDeed 11.37%, thE CAgr was onLy 9.49%. That’S stilL pRetTY Good, tHOUgH, riGhT? Let’s plug tHAT inTo our ReTireMent calCulator along with ouR $1200 In aNnual savings aNd sEe hoW WE dId.

UH Oh. iNstEaD Of $1 mILLion
 the other 4 years, though . You earn ed awho ppi ng  199 % in  year 2, and 5 0 % in  years 3, 4, and 5. Yo ur “a ve r age” re turn,  then,i s: (-9 9%  +  19 9% +50% +  50 % + 50% ) / 5 = 50 %
Ru n your $100t hr ough those  re sults though , a nd you  w ill see t hat  youin fac t  windup with j us t  $10.S o you c a n  s ee,your average retu r nr eally was 50%,  and y ou we r e  no t d efrauded.Ye t rat h er than gr e a t lyc ompounding yo ur wealth,y oulost 9 0%  of your m oney. 
N eve r Use Avera ge R eturn

Le t me b e  blunt. The ent ire co nce ptof “ a ve ra gere t urn ”  f ora n i nvestmen tte chniq ue,i n d e x, o r m utua l fun d is utterlyuse less .  Wo rse t han u sele ss , infact,becau se  it is so easil y mi sundersto od. 
The  f igure you ac tua lly  want t o use i s  so me t h i ng  called the Compou nd A ve rage Gro wth Ra t e,  o r  CAGR. T hi s f igur e gives  ana cc urate ac counti n gof  what w ou ld rea ll y h app en if youinvest ed a sum  of m o ney over time. 
Taking anoth e rl o ok at o urabove examp le,w hile  the av era g e ret urn i s5 0% ,  the CAGR is approx im ately-37%.  Plug that nu mber in fo r 5  years,andy ou ’ ll see that it  accu rately pre d icts you r $10  final b alance. Q u i te a dif fer enc e,eh? Un fortunately,m a ny p eo ple’s e yes  glazeove r w hen  th ey  see acro nyms lik eCA GR  s cat tered among lo ts  of  f ina ncial gobble dygoo k. I t’ sa lso  much h a rd e r  toco mp utetha na sim plea ver age. Th e uninfor med will  o ft en latc h onto a simp le r term lik e“av erager e turn,” s ince it is much easiert o under sta nd. O r so  they thi nk. 

Youkno w  bette r, now , tho ug h.N e xt ti m e  y ouse e the term “ ave ragere turn ” or an ything similar thr o wnaround, yourSpi deys e ns e s h ou l d g oo ffi m mediately. Chan ces are ex tr e me ly high th a t w ho ever is  usingit is eithermisinform ed, misle ad ingy o u,or misusin g the te rm. You h a d bes t  f ind o utwhich. 
The  Fall acy in Act ion
Let’sse e howthisfa llacy pl ays out for our hypothe ticalretir eme nt plan.Asi t t urns out,  whi le the ave rag e s tockmar k et re turn fr om1 900 t o 20 1 1 was ind e ed  11 . 3 7% , the CAGRw a s  on ly 9. 49% .  That’ s st ill pretty good,t hough, right?Let’ s plu g t h at i nt o our retireme ntca l c ulator a lo ng with our  $1200 i na nnual  savin gs and  see ho w we did.
Uh o h.Instead o f $ 1m illion
 the_other 4_years, though. You earned_a whopping_199%_in year_2,_and 50% in_years 3, 4,_and 5. Your “average”_return, then, is:

(-99%_+_199% + 50% + 50% + 50%) / 5 = 50%

Run your $100 through_those_results though,_and_you_will see that you in_fact wind up with just_$10. So_you can see, your average return really was_50%,_and you were_not defrauded. Yet rather than greatly compounding your wealth,_you lost 90% of your money.

Never_Use Average Return

Let_me_be_blunt. The entire concept_of “average return” for an investment_technique, index, or mutual fund is_utterly useless. Worse than useless, in fact,_because it is so easily misunderstood.

The_figure you actually want to_use is_something called the Compound Average_Growth Rate, or_CAGR. This_figure gives an_accurate accounting of what would really_happen if you_invested a sum of money over_time.

Taking_another look at_our_above_example, while_the average return_is_50%, the_CAGR_is approximately -37%. Plug that number_in_for 5 years, and you’ll see that_it accurately predicts your_$10_final balance. Quite a_difference, eh?

Unfortunately, many people’s eyes_glaze over when they see acronyms_like CAGR_scattered among_lots of financial gobbledygook. It’s also much harder to compute than_a simple average. The uninformed will_often latch onto a_simpler term_like_“average return,” since_it_is much_easier to understand. Or so they think.

You_know better,_now, though. Next time you see_the term “average return”_or_anything similar thrown around, your Spidey_sense should go off immediately. Chances_are extremely high that whoever_is_using_it is either misinformed, misleading_you, or misusing the term. You_had best find_out which.

The Fallacy in Action

Let’s see how_this_fallacy plays out for our hypothetical_retirement_plan. As it turns out, while_the_average_stock market return from 1900_to 2011 was indeed 11.37%, the_CAGR was only 9.49%. That’s still pretty good, though,_right? Let’s plug_that into our retirement calculator_along_with_our $1200 in annual savings and see how we did.

Uh_oh. Instead_of $1 million