Let’s Bury The Myth Of Averages
Remember those average annual returns touted by index-investing proponents? They don’t add up.
If we’ve learned anything from one of the worst years in financial history, the most important has to be the myth of averages.
No single factor has played a greater role in the destruction of people’s wealth and retirement plans over the past quarter century than the investment return assumptions on which most advisers and financial services firms base their clients’ portfolios and their product pitches.
The biggest myth is that the stock market returns, on average, about 10% a year. This figure was baked into so many retirement plans that you’d think it was a scientific fact, like the chemical composition of water. Turns out the actual long-term average annual return of the stock market from 1926 to 2008 (as measured by Standard & Poor’s) comes out to an inflation-adjusted 6.2%, with dividends reinvested but before taxes and transaction costs.
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