Both Earned 20%… But One Lost Money! 🤔

Discover why average returns can be dangerously misleading and how two investors with identical 20% average returns can have completely different outcomes.

The Shocking Truth About Average Returns

Here's a financial riddle that stumps most investors: Two people both earn an average return of 20% per year over 5 years. One ends up with a profit, while the other loses money. How is this possible?

The secret lies in one word: VOLATILITY

Meet Sarah and Mike

Both start with $100,000. Both achieve a 20% average return over 5 years. But their journeys—and outcomes—couldn't be more different.

Sarah's Steady Path

Consistent 20% each year

Year 1: +20% → $120,000

Year 2: +20% → $144,000

Year 3: +20% → $172,800

Year 4: +20% → $207,360

Year 5: +20% → $248,832

Average Return:

20% per year

Final Balance:

$248,832

Profit: $148,832 (148.8%)

Mike's Volatile Path

Wild swings, same 20% average

Year 1: +60% → $160,000

Year 2: -30% → $112,000

Year 3: +50% → $168,000

Year 4: -20% → $134,400

Year 5: +40% → $188,160

Average Return:

20% per year

Final Balance:

$188,160

Profit: Only $88,160 (88.2%)

The Shocking Difference

Same Average Return

20%

Difference in Outcome

$60,672

Mike Lost

32%

compared to Sarah!

The Mathematical Truth Behind the Illusion

The Arithmetic vs. Geometric Return Trap

When financial advisors or fund managers quote "average returns," they're usually talking about arithmetic averages (add all returns, divide by number of years). But what actually happens to your money follows geometric returns (compound growth through multiplication).

Sarah's Returns:

Arithmetic Average:

(20 + 20 + 20 + 20 + 20) ÷ 5 = 20%

Geometric Average (Actual):

20%

✓ Matches perfectly!

Mike's Returns:

Arithmetic Average:

(60 - 30 + 50 - 20 + 40) ÷ 5 = 20%

Geometric Average (Actual):

13.5%

✗ Massive difference!

Why Volatility Destroys Returns

The greater the volatility (ups and downs), the wider the gap between arithmetic and geometric returns. This isn't a theory—it's mathematics.

Scenario	Arithmetic Avg	Geometric Avg	Gap
No Volatility (Sarah)	20%	20%	0%
Medium Volatility (Mike)	20%	13.5%	-6.5%
High Volatility	20%	8.2%	-11.8%

Key Insight

The more volatile your returns, the bigger the "volatility drag" on your actual wealth accumulation. This is why consistency beats volatility in the long run—even when the averages look identical.

Real-World Implications for Your Money

Why This Matters for Stock Market Investors

Market Volatility is Real

The S&P 500 might average 10% per year over decades, but individual years can swing wildly from -37% (2008) to +31% (2019). This volatility creates a significant drag on compound growth.

Retirement Account Risk

If you're in retirement and taking withdrawals, volatility becomes even more dangerous. A few bad years early in retirement can devastate your account, even if the long-term average looks good.

Marketing vs. Reality

Investment firms love to advertise "average returns." Now you know why your actual results might fall short of their promises—volatility is eating your returns.

How to Protect Yourself

Downside Protection

Consider products with floor protection (like fixed indexed annuities) that prevent losses while still allowing for growth.

Focus on Consistency

Strategies that deliver more consistent returns (even if slightly lower) often outperform volatile high-return strategies over time.

Understand Real Returns

Always ask about geometric (compound) returns, not just arithmetic averages. Ask about volatility and worst-year performance.

Strategic Asset Allocation

Diversify across strategies that work differently in various market conditions to reduce overall portfolio volatility.

See It for Yourself: Interactive Comparison

Compare different volatility levels with the same average return

Low Volatility (Sarah)

$248,832

Best Outcome

Medium Volatility (Mike)

$188,160

24% Less

High Volatility

$146,933

41% Less!

Key Takeaways

Average Returns Are Misleading

Two investments with identical average returns can produce dramatically different wealth accumulation due to volatility.

Volatility Is Expensive

The volatility drag can cost you tens or hundreds of thousands of dollars over a lifetime, even with the same "average" return.

Consistency Wins

Strategies that deliver consistent, protected returns often outperform volatile high-return strategies in the real world.

Protection Matters

Products with downside protection (zero floors) eliminate the devastating impact of negative years on your compound growth.

Ready to Build Wealth Without the Volatility?

Discover strategies that deliver consistent growth with downside protection—so you never have to choose between growth and safety.

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