<p>^ Where did you see that? I don’t think I’ve seen anyone calculate averages like that. That seems deliberately deceptive.</p>
<p>The way most average returns are calculated is using the beginning value and ending value over the span of time, taking into account any dividend or interest payments, and using an IRR program to calculate what rate of return would have produced an identical pattern. They aren’t calculated in the “sigma” method that your example uses. </p>
<p>I would caution anyone looking to the past as a gauge for the future. The post war period saw the US as the only major economic power with an intact physical plant, and there had been millions of young men removed from the labor force (killed). Interest rates ramped up during the late sixty’s through August of 1982, when Volker got scared and realized that the cure was worse than the disease (of inflation). Since that time, the rate on the 10 year treasury bond has fallen from the mid teens to 2.5%, which has created a massive upwards revaluation of assets of all kinds. The bottom line is that that isn’t going to happen again anytime soon. Real returns, IMO, are likely to be mid single digits at the best. </p>
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<p>There is, it’s called the geometric average. That’s the average everyone has been using in this topic. </p>
<p>Yes, as @dadx and @vladenschlutte state - the annual return on that portfolio over the two year period would be 0%. </p>
<p>It should be since you can’t average percentages calculated on different bases as it was done in the example. That makes averaging less useful and open to abuse. We use averages to gauge quantities independent of details. In that sense, average percent is meaningless since it always depends on start and end points and how many years we are averaging over.</p>
<p>Iglooo, just google geometric average. That’s the average being used, not the arithmetic mean you were trying to use. </p>
<p>The geometric mean is 0. The way it’s calculated is you take the product of the factors of change, and exponentiate to the multiplicative inverse of the number of periods. So in your example the factors of change are 2 and 0.5, and there are 2 periods, so (2*.5)^(1/2) = 1. Meaning the return was 0%. </p>
<p>Well, HIMom, that’s it! HI longevity! I told Mr B that we are moving to HI when we are done with the “mainland business”. Wait, we are never going to be done with the mainland business… Lol.</p>
<p>By geometric mean, I am guessing you mean if your return is 100% over 10 years, it’s 10% per year although year to year it is about 7%. To me the term, geometric is confusing. I would think it’s more like an algebraic mean since you simply divide the total gain with the number of years disregarding compaounding effect.</p>
<p>I am not trying to use anything. To me, the return is always measured from the starting point to what I have in hand. I am just trying to understand how our ex- FA came up with beautiful numbers although we never got as rich as the number would imply. We had a simple account that we never touched other than paying the fees and taxes associated with it. It made it easy to see how well or bad it’s doing.</p>
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<p>NO!</p>
<p>Geometric mean would be 100% over 10 years is 2^(1/10)=~1.072 = 7.2% a year.</p>
<p>Just google geometric mean. Wikipedia can teach better than me. </p>
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And therein lies the true genius of many financial advisers! ;)</p>
<p>I’m really getting a lot out of the Bogleheads’ Guide to Retirement Planning – thanks for the suggestion, IxnayBob!</p>
<p>It is as @vladenschlutte says.</p>
<p>A mutual fund that doubles in 10 years would be showing the public an annual return of 7.2% over the 10 year period.</p>
<p>I like the “rule of 72,” whereby you divide your real I annual interest rate into 72 to figure out how long it will take for your investment to double (assuming compound interest), I will look up geometric mean, which I just heard of the first time today.</p>
<p>I agree that FAs and others paint such a rosy picture. They often don’t count their fee, which significantly erodes any gains you would otherwise receive from your investment. that 1% (or more) every year whether your account grows or shrinks quickly erodes your gains and principal of the account!</p>
<p>That 1 percent fee is a big number because it is based on assets and not profits. </p>
<p>Yes, the 1% looks innocuous enough until you see how much it reduces your overall account over time–really shocking then!</p>
<p>And if you look at the table posted earlier predicting 2-3% real growth for the next 10 years, paying 1% is about paying 50% of your net growth. </p>
<p>One thing we got out of our FA was during 2008-9. They took care of it while we were petrified. It’s not all bad.</p>
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<p>That’s better. That’s more like what I expect from “geometric”. Earlier you quoted 9.7% for the geometric means. Therein lies the confusion.</p>
<p>I quoted 9.1% for the S&P 500 over the past 20 years…</p>
<p>Can’t predict the future but I think those numbers (9.1%) are going to be hard to achieve. I could be wrong.</p>
<p>I think dadx’s analysis is very good.</p>
<p>Have read Bogle & others suggesting growth numbers of MAYBE 5% returns in stocks and less in bonds going forward, but “the future is unclear.”</p>