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IFI Average Return Video
There is a glaring error in the math commonly used in the investment industry to illustrate comparative performance of stocks, bonds and other vehicles. It’s so overlooked that even some of the representatives that companies send out to explain and promote their products are unaware of it. The culprit is average annual returns, and the flawed way they are used in marketing materials for financial products.
Average annual return is as irrelevant to investing as average annual temperature is to weather. Minneapolis’s average is 45 degrees, but that won’t help you pick the right clothes to wear in January. By the same token, knowing the average annual return of stocks in the past won’t help an investor with financial planning.
The glaring error is that stock market returns vary every year. To project a theoretical return based on the assumption that stocks rise by the same percentage every year is careless and misleading and the practice should be discredited and discontinued. The stock market has never risen by the same amount for decades at a time, so the calculation is just a distraction for anyone trying to put together a retirement plan.
Confused, enticed? I welcome you to view our video on the average and start changing the conversation today!