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.
"...it’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.Read all