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Real Rate of Return: Average Rate of Return Is Not Real - YouTube
Channel: The Money Advantage
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let's talk about average rates of return
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why they're like a ghost in the market
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and why this matters to you now there's
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this commonly held and deep-seated idea
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that I will just work today I'll put my
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money into some type of retirement
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account that's invested in the stock
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market and over the long haul I will
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probably get between I don't know five
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six seven two maybe up to ten percent
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return on my money year over year and
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then when I get to retirement whenever
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that may be then I will have this big
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pile of money that I'll be able to live
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off the interest preserve that principle
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and the money will last me until I die
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the problem is there's so many flaws in
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this reasoning and one of them is that
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we really simply just don't really
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understand what those average rates of
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return actually mean so I want to
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uncover this and even divulge some
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information to you that will help you to
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really critically think through your
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life financial plan because you want to
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build time and money freedom you want to
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be in a position where you don't have to
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worry about money where there's more
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than enough and you don't have to feel
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limited and constrained now when we live
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our lives according to that status quo
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way that the financial world should
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technically work often what we're basing
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our ideas on our average rates of return
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that are projected by the companies and
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the market and the funds that are
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showing what their average historical
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returns have been but there's a lot of
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things that you need to think through
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and read between the lines because
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frankly we look at these numbers and
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then when we calculate where we should
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be our experience doesn't usually line
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up with that expectation and so we
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wonder where's the disconnect where am I
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not getting something if I get a 6%
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return every year here's where I should
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end up but here's where I actually am so
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what happened so the first thing we want
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to talk about is that average rates of
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return are
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the medical number and actual returns
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are completely different in reality
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average rates of return actually mean
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nothing at all so here's why let's say
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you had $100,000 in an account and you
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lost 10% of the value now you're in a
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position where you're at $90,000 in that
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account if the following year then you
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received a 10% gain a plus 10% return
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would you expect that account to be back
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to flush where you started actually no
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because a 10% gain on a $90,000 account
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is 90,000 $900 you're still short by
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$100 it actually takes a bigger game to
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recover from a loss it takes at an 11.11
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1% gain to return you back to where you
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started with if you had a 10% loss so
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why is this well it's because that your
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losses actually have a greater impact in
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your grand scheme of things than your
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gains now let's look at this if you lost
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50% in your account you would actually
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need to have a hundred percent gain to
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recover back to zero here's the
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interesting thing if you took a 50% loss
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negative fifty at a hundred percent gain
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that's plus 100 the number is 50 we
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divide that by two years you actually
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had an average return of 25% per year
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now here's why it gets ridiculous
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because that doesn't mean your account
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grew by 25% this year and then grew by
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25% the following year it in fact
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doesn't mean anything at all so average
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rates of return are not what we want to
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base our entire life plan on you really
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want to look at actual returns now when
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we get to actual returns here's what
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becomes very interesting it's not just
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about staying in it for the long haul
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there's research that shows how your
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performance of funds within a certain
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index perform over time and if you
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stayed in ten
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fifteen 20 years and you can calculate
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what those have been in the past every
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twenty year segment does not end up with
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a positive return in fact some are
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negative some are just barely breaking
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even some are barely over 3% and here's
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what's even more interesting when you
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factor in the cost of management fees
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that further reduces your rate of return
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you also need to factor in how am I
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going to be taxed on this game if I'm
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gonna make taxes that is going to cut
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into my earnings and lower my rate of
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return and what about inflation I need
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to at least keep up with inflation to
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make sure that my gains are something
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worth even talking about so that I can
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live on that money so when we look at
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this what really comes to the surface is
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that the most important thing is when
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you start and when you leave the market
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it really has nothing to do with a span
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of time it has everything to do with
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which starting point you choose in which
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ending point and last time I checked I
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don't have a crystal ball to know
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exactly if my starting year and my
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ending year are going to be perfect in
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the future we can only look back at
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history and say what did history do and
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here's the interesting thing as well
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just because something happened last
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year or the last 10 years doesn't mean
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it will apply directly to the next ten
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years or to the next one year history
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does not dictate the future the future
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could be completely different from what
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we had in the past so where does this
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leave us in a ball of confusion probably
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but here's what you can do to take
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control of your financial destiny and
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really get behind the reins and direct
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the course of where you're going and
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knowing and know that you're going to be
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able to approach that with confidence
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and certainty first you want to have
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safe guaranteed money that is saved and
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you know it's not going to drop in value
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you want to be able to access that money
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so that you can use it and you want to
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earn compound interest and not interrupt
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that compounding then when you invest
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money you want to invest in what you
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no in control because that is what
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minimizes your risk and minimizes your
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loss so when you combine these two ideas
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together saving in a guaranteed
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predictable place first and then
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investing in what you know in control
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you want cash flow you want to be
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putting your money to work in assets
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that produce cash flow because if you
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know that you have a hundred thousand
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dollars of cash flow this year and that
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you can purchase more assets and have
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two hundred thousand dollars of cash
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flow next year it doesn't really matter
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what your total net worth is what you do
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know is that you will be guaranteed to
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have a quality of life that you want
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because you have the cash flow that you
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need so I hope this is a paradigm shift
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for you but also maybe it helps you
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realize why you've had some of that in
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congruence or confusion about what the
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market is doing and how you can direct
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your financial future you can get more
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information about privatized banking a
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specific way that we help you to save in
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predictable guaranteed places and then
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be able to invest in what you know in
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control and that is one of the keys to
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helping you build time and money freedom
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Hey
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