Investing Myth #3: Average Investment Returns Tell an Accurate Story
If your investment portfolio experiences a 20% gain and a 20% loss, your net change is zero…right?
WRONG! It absolutely depends on the order of those events.
If you begin with $100 and first experience a 20% gain, you then have $120. A subsequent 20% loss would result in a final amount of $96.
If, however, the sequence was reversed, with the loss first and the gain second, the final balance would be $115. That’s a small difference in this case, but when your portfolio holds more than $100, the impact is substantial. If “average investment return” doesn’t factor in the timing of gains and losses, the number is useless. The “actual” return and the “average” return will never equal one another anytime you have to factor in a negative number. If, however, you can employ a strategy that never has to factor in a loss, then the actual and average investment return rates will always be the same.
Insulating your investments against losses sounds wonderful, but how can you always stay on the positive side of zero? There are financial strategies that do this, easing your mind about the wide swings in the market. By trading a small amount of upside for the guarantee of no losses, you protect your portfolio from downside impact. Particularly for those approaching or in retirement, being able to count on that downside protection is vital.
To truly understand what your returns really are, including how hidden fees impact them, it’s important to talk with an expert who has your best interests in mind. Someone who knows your unique situation, can properly analyze all your holdings, and find allocations for safety in turbulent financial times. An Independent Financial Planner will guide you through a comprehensive plan that emphasizes downside protection and will find the right solutions to help you accomplish your goals.
Contact us for a free consultation.