Are you really getting the returns you think you are? Here’s why understanding this difference could make or break your financial future.
We all want to make smart financial decisions that grow our wealth securely. But here’s the truth: if you’re relying on “average returns” when evaluating your investments, you may be getting a completely misleading picture.
Let’s break down what you really need to know about average vs. actual returns so you can protect and grow your wealth the right way.
The “Average” Trap: Why Average Returns Are Misleading
Have you ever heard financial entertainers or advisors boast about the average rate of return? It sounds impressive, right? But there’s a hidden trap in relying solely on average returns. Financial entertainers often take annual returns, sum them up, and divide by the number of years to produce a shiny average percentage.
It sounds logical, but here’s why it’s misleading: it doesn’t represent your actual financial experience.
A Hypothetical Journey: Average vs. Actual
To truly understand why average returns can deceive you, let’s look at a simple example:
- Year 1: You invest $100, and the value goes up by +100%, doubling it to $200.
- Year 2: You experience another great year with another +100%, bringing your total to $400.
- Year 3: The market takes a turn, and you lose -50%, dropping your account to $200.
- Year 4: Another -50% loss leaves you right where you started, at $100.
Now, if you calculated the average return across these four years, it looks like this:
(100 + 100 – 50 – 50) / 4 = 25% average return.
But here’s the kicker: even though you “averaged” a +25% return, you actually ended up with 0% growth on your investment. You started with $100, and ended with $100.
The Reality of Actual Returns
Average returns are easy to market and sound great, but they hide the reality of your financial experience. In our example, the actual return is not +25%—it’s 0%, because of how gains and losses interact.
This is what financial entertainers and conventional advisors often fail to tell you, but understanding this distinction can change the way you approach investing.
Why Understanding Actual Returns Matters
The difference between average and actual returns is critical for making informed decisions about your money. Would you rather have the truth or a fancy number on paper?
Understanding actual returns helps you:
- Evaluate risk more accurately.
- Protect your investments against sequence risk.
- Make better, long-term decisions aligned with your goals.
What Can You Do About It?
If you’re tired of the misleading averages and want to take control of your financial future, it’s time to educate yourself on actual returns and how to build your wealth intelligently.
I’ve helped many people understand this concept and structure their investments to truly grow their wealth—not just look good on paper. And you can do it too.
💡 Take Action: If this resonates with you, don’t let the conversation end here.
👉 Download my free audiobook at financialcaffeine.com to dive deeper into wealth strategies that truly work.
👉 Or, schedule a one-on-one consultation at financialcaffeine.com/survey to learn how to make your investments work for you.
Your Turn: Have you ever been shown an “average return” that seemed too good to be true? What steps are you taking to ensure your investments are actually growing? Leave your thoughts in the comments below—I’d love to hear from you.