What do we get when we look up the word myth in the dictionary?
- any invented story, idea, or concept:
- an imaginary or fictitious thing or person.
- an unproved or false collective belief that is used to justify a social institution.
Myths are just that, an invented story on a concept. Under myths, I would put the average rate of return. We have been so “conditioned” to listen for this number that we put our “golden years” on it. When it comes down to it, the average is nothing more than a mythical number. Your investment statement won’t show average and you can’t spend it.
A couple of the gurus will tell you to expect a 10% average from the S&P on your investment but let’s take a look at what they are talking about. They take each year’s numbers, add them up and then divide them by that number of years. Well, that number is correct, there is no disputing that, however, that is not the actual number showing on your statement.
Here is a screenshot of Average and Actual from 1990-2011. As you can see the average is 9.85%, with the actual being 8.15%. If you take all the gains and losses, subtract them all for each year, in the end, you get the actual.
How does that impact your bottom line if you have $100,000? Look below, the average showing $654,638 vs the actual at $479,215.
So, why is it that the numbers are different??
This brings us to what I call market math – buy and hold strategy- and why it doesn’t work. I will try to explain this best I can on paper.
First, a question, if one was to put $100,000 in a portfolio and then lost 50% in year one, they would have $50,000. Then in year two, they gained 50%, would they have $100,000?
If you answered YES to this question, you are wrong. I will explain why.
In year one the portfolio went down by 50% and there is $5,000 left. That is easy. However, the new starting balance is $5,000 and 50% growth on that is only $2,500 putting the new balance at $7,500.
You are where you started!
Keep in mind one more thing they don’t tell you, this rate of return is BEFORE FEES AND TAXES. Fees along will drop this by another 1%-4%.
Let’s look at a real example by going back to the actual rate of return from the above illustration at 8.15%. This is not bad, however, you have yet to remove the fees and taxes we just talked about. Fees can range anywhere from 3.17%-4.17% inside of those mutual funds, as you see in the “Ten Things They Don’t Want You To Know About 401k’s” report. When you remove taxes and fees you are lucky to be at 2% growth.
That is some pretty good conditioning on the side of the market and the advisors. If you have not already, it is time you start asking yourself why you are contributing money to this system and be truthful with yourself. Is it because you know what is going on inside or is it because it’s the only way you know how to save for retirement?
Retirement is the biggest thing in our lives we save for yet we put it at risk. Whoever “conditioned” us to think that was ok are the same people that sold us on the myth of average rates of return.
You may be thinking you can’t do anything about it because you’re not wealthy. I am here to tell you that hard working American’s can create an abundance of wealth by using the Infinite Banking Concept. You do not need to be wealthy to start, you just have to start.
Decide when the time is right for you and give us a call to learn more – 701-751-3917.