by Scott Greenberg, CFP®, RICP, ChFC, Scott J. Greenberg Private Wealth Management
Every week I meet with successful individuals and families
who want help getting their financial house in order and their investments
optimized. When we look at the statements together, one of the items that most
people immediately look for is the average returns they received on their investment
and retirement accounts. Unfortunately, these numbers are not the best way to
gauge which fund, manager, or security is the best option to include in your
portfolio. Of course there are important factors to consider like investment
philosophy, risk comfort level, turnover ratio, time horizon and others, but I
thought it would be helpful to focus just on the “average return” item to help
add some clarity.
Picture a hypothetical investment (any kind) that goes up by
25% in one year, and then down by 25% the next year. Most people can identify
that in this scenario, the average return is 0%. And, most people intuitively
think that means the account would have returned 0%, and they would be back to the
starting amount. However, that is not the case.
Let’s say we started with $100.
After the first year we would have $125.
After the second year we would have $93.75. What?! Yes. The same thing occurs if we pretend we
lose 25% in the first year (giving us $75) and then gain 25% in the second year,
bringing us to $93.75.
So this is how averages can be misperceived, because the
starting point is rarely the same. The problem is that the greater the account
becomes, the more painful the percentage losses are, and the smaller the
account becomes, the less powerful the percentage gains are. So, for my clients,
I don’t talk about average returns, (partially because they don't give the
investor a good representation of how much they actually will have at the end
of the period), and partially because they certainly don’t give any measure of
what will occur. Focus on managing
volatility and constraining downside losses through appropriate, diversified
investments. Need help managing volatility with your portfolio? Just ask, I am in
the neighborhood and ready to assist.
This general information should not be construed
as investment advice. Diversification does not guarantee a profit or
protection against an investment loss. The examples discussed in this article
are entirely not indicative of any particular investment, asset class or
financial product. Scott Greenberg
offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member
FINRA, SIPC, offers investment advisory products and services through AXA
Advisors, LLC, an investment advisor registered with the SEC, and offers
annuity and insurance products through AXA Network, LLC. Scott J Greenberg
Private Wealth Management is not a registered investment advisor and is not
owned or operated by AXA Advisors or AXA Network. Individuals may transact business and/or
respond to inquiries only in state(s) in which they are properly qualified. AGE- 109876(01/16)(exp.01/18).