The Myth of the Average Rate of Return

Jake & Gino: Real Estate Investing & Multifamily

Jake & Gino

Smartinvesting, Buyingrealestate, Investing, Multifamilyrealestateinvesting, Business, Investingsmart, Apartmentinvesting, Management, Makingmoney, Realestateinvesting, Cashflow, Jakeandgino, Realestateinvestment, Commercialrealestateinvesting, Buyingapartmentbuildings, Entrepreneurship

4.9 • 842 Ratings

🗓️ 15 June 2022

⏱️ 8 minutes

🔗️ Recording | iTunes | RSS

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Summary

On this episode, Kristin Colca busts the myth of average rate of return and explains how an investor can calculate actual rate of return taking economic and market dynamics into account. Did you know that although it is widely accepted as an indicator of how an investment may perform in the future the average rate of return can be wildly misleading? If there is any kind of volatility in an asset, taking the average return disguises the recovery time needed when future volatility inevitability occurs. This can lead to unrealistic expectations about how much an investment will be worth in the future. Kristin shows a real life example of average and actual rates of return using the S&P 500, and shows that taxes and fees can further deteriorate the return you think you’re receiving. Why ride the roller coaster of volatility when there is an alternative that can offer you guaranteed returns year over year and access to your cash income tax free? Key insights: 00:00 Introduction 01:03 Taking volatility into account 01:38 Interest rates’ dynamics 03:24 How to calculate Average and Actual Rate of Return 06:15 Factoring-in expense fees 07:46 Disguising the historic volatility If you want to learn more about the benefits of whole life policy, check out this episode as well: https://100yearrei.com/signup-the-benefits-of-a-100-year-rei-policy/ BONUS Resources: Download our eBook on how you can leverage on our Dual Asset Strategy and become your own source of financing: https://100yearrei.com/ebook-download/ NEXT Step: If you want to learn more on why should add a cash value Whole Life Insurance Policy to your financial plan (and even the plan for your children), get in touch with our Team here: https://100yearrei.com/callnow/ About The 100 Year Real Estate Investor The Whole Life Insurance Policies offered by the 100 Year Real Estate Investor are specially-designed. This means they work harder toward achieving your financial objectives, no matter what they may be. Check out this blog for 7 facts about our specially-designed strategies that may not be true about typical whole life policies: https://100yearrei.com/7-facts-about-specially-designed-whole-life-policies/ About Jake & Gino Jake & Gino are multifamily investors, operators, and mentors who have created a vertically integrated real estate company that controls over $100,000,000 in assets under management. They have created the Jake & Gino community to teach others their three-step framework: Buy Right, Finance Right and Manage Right®, and to become multifamily entrepreneurs. #wholelifeinsurance #personalfianance #wealthbuilding #realestateinvesting Jake & Gino Facebook: https://www.facebook.com/jakeandgino/ Jake & Gino Twitter: https://twitter.com/JakeandGino Jake & Gino Linkedin: https://www.linkedin.com/company/jake-and-gino-llc/ Jake & Gino Instagram: https://www.instagram.com/jakeandgino/

Transcript

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0:00.0	Hi, everyone. This is Kristen Kolka with the 100-year real estate investor.
0:12.3	And today I wanted to talk to you about the myth of the average rate of return.
0:18.3	Now, this is an important topic because a lot of people use the average rate of
0:22.9	return to evaluate an investment. And they take the average rate of return and almost use it as an
0:30.1	expectation of what kind of return they're going to get on that investment every single year.
0:36.4	Doing that, however, can be quite misleading because it
0:39.3	does not take into account volatility. Volatility, of course, is when an investment's value
0:44.8	goes up and down over the years. And when that happens, there is time that's needed to make up for the
0:52.7	losses. And so that can really kind of bring down that annual
0:58.1	rate of return in relation to the average rate of return. So to expand on that a little bit more,
1:04.3	of course, unless the investment has a fixed rate of return, they're not the same thing.
1:09.8	The average rate of return is very different
1:12.3	than the actual annualized rate of return. If you have a fluctuating interest rate,
1:19.4	such as a mutual fund, average is not equal actual. And like I said, this can be very misleading
1:25.7	because if you use the average rate of return as an expectation of what you're going to be getting each year, you may end up being pretty disappointed.
1:34.1	So here's kind of an extreme example of how that works.
1:37.9	What you have here is $10,000 going into an investment.
1:42.5	And the very first year is a great year. This particular investor gets a
1:46.8	100% return on his investment. So he ends the year with $20,000. Year two, unfortunately, the market
1:55.5	goes down 50%. That $20,000 turns back into $10,000.
2:07.7	Year three, another great year, up 100% again, $10,000 turns into $20,000.
2:12.4	But again, in year four, we have a 50% downturn.
	...

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