People think of investing like a batting average – “As long as I get more hits than strike outs, I’m winning.” But in investing – those strikeouts (investing losses) are far more costly than most of us understand.
Let’s go back to 9th grade math. When we start with $100 and lose $20, we’ve taken a 20% loss. But to get back to break even, we have to grow our $80 by 25% (80 X 1.25 = 100).
But the story doesn’t end there. Let’s say after suffering that 20% loss, I have two great years – a 25% gain (to get back to even) followed by a 10% gain.
Wall Street world would say I’ve experienced average annual growth of 5% (-20% + 25% + 10% = 15% / 3 years = 5%). In fact, mutual funds promote themselves using this math – which bears no reality on how your money is impacted.
If my money has been employed for a full three years and grown from $100 to $110. That’s a compound annual growth rate of 3.2% – not 5%.
How can that be?
In math, “averaging” is meaningless when a negative number is part of the series. But since Wall Street knows there will always be losses – this average “shows” better than what really matters – the compound annual growth rate of our money. So it serves their purpose.
Albert Einstein calls the Law of Compound Interest, the 9th Wonder of the World. When it works for you – it’s magic. When it works against you – it’s devastating. Don’t let this Wall Street trick victimize your money – take investing risk out of the equation altogether? Reply with the word “How” and let us show you.