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The Danger of Averages

Math is a funny thing, especially when it comes to averages.  Let me show you what I mean.

Let’s assume you have $100,000 in a financial product.  The first year it gains 10% and the second year it loses 10%.  Your average return is 0%, right?  We add 10, then subtract 10, then divide by 2 years.  That’s an average of 0%.

But you've actually lost money in this scenario, and here’s how.  Start with $100,000.  You gain 10% the first year, so now you have $110,000.  Then you lose 10% of the $110,000.  In other words, you lost $11,000, which leaves you with only $99,000.

You averaged 0% but you lost money.  Now let’s reverse the scenario.  You lose 10% the first year and gain 10% the second year.  Your average return is still 0%, isn't it?

Start with $100,000.  You lose 10% so now you have $90,000.  Then you gain the 10% back.  But you’re only getting 10% of your $90,000.  That’s $9,000 you earned back, leaving you with only $99,000.

Again, you've lost money with an average return of 0%.  Maybe we can all agree that math can play tricks on us.  So what?

Well, what if you didn't have to worry about the math working against you?  What if you didn't have to worry about going backwards financially?

What if you followed the 2 simple rules we've been using with your clients for over 20 years?

Rule #1:  Just don’t lose the money

Rule #2:  Don’t forget rule #1

 

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