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Comparing Actual vs. Average Returns

Comparing Actual vs. Average Returns

August 25, 2022
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Average returns on an investment can sometimes sound better than they are. If I asked you if you would be happy with a 25% average return over the next two years, what would you say?

Most people I ask would be ecstatic with a 25% average return. However, for example, if you have $1,000 and earn 100% the first year, you will now have $2,000. But if in year two, the return was -50%, you would be back to $1,000. Your average return was 25% per year (100%-50%=50%/2 years=25% average) but you are left with only $1,000, the same amount as your original investment, after the two-year period. Keep this in mind next time you are comparing average vs actual returns.