The Myth And Realities Of Your Average Rate Of Return
This is the single most factor that everybody gages their investment decision “What is the rate of return?” and it depends on who you ask. If you ask an investment broker, he is going to tell you the average rate of return on XYZ mutual fund is 6%. But what you want to know is the actual rate of return of the investment.
You see, the rate of return is comprised of two types of return, average return, and actual performance. The difference has to do with LOSSES, and you see when calculating average returns, gains and losses are equal in weight. For example, a +50% followed by -50% leaves an average yield 0% easy enough. Let’s look at the actual rate of return if you have $100,000 and you made 50% return your balance would be $150,000, now take $150,000 and -50% gives you a balance of $75,000. That is an actual rate of return of -25% on from your original investment of $100,000 that’s a big difference.
So, I took a fixed indexed annuity with a top company that will give you 54% of the upside of the S&P 500 with 0% downside risk using $100,000 and compared it to the S&P 500 with 100% of the gains and 100% of the losses going back from 1998 to 2017. The results are that the S&P 500 with 100% of the gains and 100% of the losses averaged 6.7% and the average fixed indexed annuity with 54% of the upside of the S&P 500, but with 0% of the downside risk, the average rate of return was 5.97%. You would think that the 100% S&P 500 account won but let’s look at the account value.
The total ending account value for the 100% S&P 500 is $275,507.76, and the S&P 500 indexed account with 54% of the upside with 0% downside risk is $311,162.85 a difference of $35,655.09 not to mention the sleepless nights when the stock market goes down. The actual rate of return for the 100% S&P 500 is 5.2%.
With the risk of the market, the volatility of the market and the hopes of large gains shrinking, why would anyone even take the chance when products exist that provide guarantees from market risk?