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Monday, August 12, 2013 - 11:28 AM
This is another one of those "obvious items" we often forget in our haste
of looking at investment returns; bottom line: don't be misled by things
like the average annual return.

     "’s very easy to be misled by percentages. If you’re given a
      choice between investments with the following sequences of annual
      returns, which would you choose?

      Scenario 1: +50%, -50%, +50%
      Scenario 2: +10%, +5%, +8%

      Well, if you look at a simple average of the returns over years,
      it’s a no brainer — Scenario 1 has an average return of 16.7%/year
      whereas Scenario 2 has an average return of 7.7%/year.

      But if you run the numbers, you’ll see that $100 in Scenario 1
      would grow to $112.50 whereas $100 in Scenario 2 would grow to
      $124.74 over the three years in question.

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cumuluscumulus330 posts since
Jan 16, 2010
Rep Points: 1,554