AVERAGE vs. ACTUAL

Since you’re the only one at risk when trying to achieve a higher rate of return, you should take some time to discover how rates of return can be misleading and misunderstood. As an example, let’s use the DOW Industrial Average over a 10-year period, using the annual rate-of-return performance for the Dow from the year 2000 through 2009. For that 10-year period, the average of the annual average rate of return for the Dow was 0.66%.  So, if you had invested $1,000 at the beginning of the year 2000 and used the Dow’s 10-year average, you would have accumulated $1,068 by the end of 2009. But, if you were actually invested in the Dow every day of that 10-year period, your real rate of return would have been – 0.81% or a balance of $922.  So, the average of the average, 0.66%, is different from the real rate of return, -0.81%. Are you surprised?

Here is a much simpler way to explain how “average vs. actual” can impact you. If you have $100 today and you lost 20%, you would have $80 left. If the next day that money went up 20%, you would have

$96. The average of the average for those two days is 0%, but in reality, you would have lost 4%. In the following day, this money lost 10% and then went up 10% the day after that, the average of the average is 0%, but you have only $95.04 left. That represents almost a 5% loss, even though the average of the average is zero.

Don’t get confused by rates of return. Remember, these are really risks of return. Companies have been playing the “rate of return” game for years, but you must understand that it is their game.

What is important to understand is that the advertised rate of return can be misleading. If someone offers you a 20% rate of return over a period of time, what does it really mean? Not much. What is far more important than any rate of return is understanding how money works in your life.

Remember, the traditional-thinking premise is centered on money; times a rate of return, over a period of time will equal some sort of expected results in the future. It’s a simple premise, with flawed results. As previously mentioned, the Dow Industrial Average has recorded positive rates of return on a yearly basis about 66% of the time. Do you feel lucky or not? Think about it, 66% is the equivalent to playing Russian roulette with two bullets in a six-shot revolver. In the future, you must consider the “risk of return” that you are exposed to and the impact it will have on your financial results.

TIME

For every step backwards, it takes two steps to go forward. Traditional thinking believes that in order to grow your money or create wealth that time is one of the main components in the equation (premise). If you are planning (hoping) to retire in 20 years, then the equation for achieving this goal looks something like this: amount of money saved each month times a rate of return compounded over 20 years. This goal (premise) can be achieved if all the factors in the equation remain consistent and go as planned. But, if you consider the “risk of return” in this equation (premise), then you must take into consideration that the marketplace, on a yearly basis, has positive returns about 66% of the time (Dow). Taking that into

consideration, the equation requires 20 years of positive rates of return, but on average, six of those 20 years will have negative outcomes. If this occurs, then the results after 20 years will be considerably short of the predicted goals.  To achieve the desired goal, six more years of investing may be needed to make up for the six losing years and another six years may be needed after that to compound the results to the desired goal. Unfortunately, if the 20-year goal was to be achieved by the time you reached the age of 65, then you have no way of making up the TIME that has been lost due to down-market years. If you lose 20% of your money in one year, you need a 25% rate of return the following year just to break even. Yes, you got your money back, but you lost two years of time. The real problem is that you lost two years that were an important factor in compounding your money. Once lost, time is very difficult to make up.

Gaining it back….

If you lose this much… …you’ll need to earn this much to break even

10%		11%
20%		25%
30%		43%
40%		67%
50%		100%
60%		150%
70%		233%
80%		400%
90%		900%
Source:	USA Today research

In traditional thinking, the premise is very important, but it is not science. Traditional assumption of accumulation of money over a period of time seldom achieves their predicted goals. You will find it difficult to get the right solution when you’re starting out with the wrong premise. Einstein once said, you can’t solve a problem using the same thought process that got you into the problem in the first place. Much of today’s traditional financial controls the outcomes and profit from doing that. To them, your desired goals may be secondary.

UNINTENDED CONSEQUENCES

Simply believing that the accumulating money to secure your future is the only challenge you face may leave you defenseless in the future. Much of the money you accumulate will be surrounded by unintended consequences. Taxes, inflation and depreciation of your future dollars and its buying power will impact your financial future.

THE FOLLOWING ARE THE SIX BASIC THINGS I DO FOR MY CLIENTS:

• Develop a strategy to increase cash flow and money supply in their retirement years.
• Eliminate all potential market losses and management fees.
• Minimize their future tax liabilities.
• Show them how to avoid the agony of the Probate Courts.
• And I never want to affect your current lifestyle in a negative way.
• Finally, accomplish all this without them spending one more dime than they are currently spending.

Call me today and let’s have a conversation about your financial destiny.