Probably you have heard or read someone tell you something along the lines of:
“If you put your money into the stock market for 30 years, you’ll average 12% returns.”
My tl;dr response to this is: No… probably you won’t.
There is a complicated mathematical reason for this, which is not very secksy and which does not fit into a cute little soundbite but… is brilliantly explained in this video (which is not mine, by the way, and is a practice exam prep video for actuaries so it is dry AF for most people — just a heads up):
In that video, he discusses the difference between something called “time-weighted return” and “dollar-weighted return.”
Again, not secksy nor is it likely to be discussed on any financial gooroo’s Tell-Lie-Vision or radio show.
This topic has confused a great many smart folk, and continues to confuse many financial experts… many of whom are giving you financial advice and charging you for the privilege (and some who dispense free advice over the Interwebs)
Dollar-weighted return is what you, as an investor, actually earn on your money and is (really) the only thing that matters.
From your perspective, as an investor, you cannot spend the “mutual fund return” or “time weighted return.”
Yes, yes, fund return does give you some indication of how good a fund manager or investment advisor is at his or her job.
Bully for him.
But… again… you can’t spend your advisor’s return on your money. You can only spend YOUR return on your money.
Does any of this matter?
Probably no, unless… you are saving money and want to have some kind of financial security in the future.
If that is the case, then it is probably one of the more important things you can understand about investing and growing your savings… especially if you are entrusting your life savings to someone else.
Anyway, that’s all I got for today. If you want more valuable tips and advice delivered straight to your email inbox, join my email list, below.