If you could earn 25% average rate of return over the next 4 years... would you take it? Most people would... just on the lure from the rate of return. The first year in this study you received 100% rate of return on your money. Most likely, your financial adviser / stock broker would be calling you every other day toasting to your combined success! The following year, your rate of return was -50%. You probably will not hear from your broker/financial adviser. The third year, 100% rate of return, again! Everyone is happy. The fourth year your return is -50%. When you get your annual statement... you will see that you got 25% rate of return on your money during those 4 years. You are confused, because you have the same amount of money you started out with. So, what rate of return did you really get? 0%!! Now I understand that this is drastic, but, this is reality. Many of us do not know what our real rate of return actually is.
Look for another blog based on this model talking about taxes and lost opportunity cost to learn that really you earned a negative return!
