Rate of return12/3/2023 ![]() However, from an actual investment value, including both gains and losses, there is an obvious disparity. If you viewed this as only a simple equation, then there isn’t any difference, as both examples ended up averaging 7%. Investors should be interested in the actual rate of return – not an average – as investment losses can be easily hidden by using an average rate of return. The Bottom Line: Actual Rate of Return Is Much More Revealing The average rate of return might have been the same, but the money in your pocket certainly isn’t. The key distinction is the end result of $134,445, or an actual rate of return of almost 6.1%, is almost $6,000 less than the previous example of $140,256. Once again, after doing the math, you will see that after five years, this investment also had an average rate of return of 7%. What Is Actual Rate of Return?Īctual rate of return is a process of recalculating and adjusting investment returns to account for both gains and losses.įor example, let’s examine the following $100,000 investment over a five-year period: Any type of stock, bond or mutual fund investment will always have both gains and losses. The average return of Walmart stock over those five years is 6.1% (30.5% ÷ 5 years = 6.1%). The end result is that while an average gain may look good, it may leave you with less money in your pocket than expected. What many might not realize with an average rate of return is that due to the nature of the calculation, gains during some years can obscure losses in others. But you know there will never be a five-year period where investment returns will be exactly the same each year. ![]() In fact, I often see projections from other financial advisers that use almost verbatim the example above. ![]() This was accomplished by adding up each annual return and dividing that number over the five-year period. As you can see, after five years, the investment had an average rate of return of 7%.
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