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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Year End Results... Date: 1/6/2004 6:53 PM
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2giantsteps: <<<<I was just wondering what everyone's return was on their 401(k) or other investment accounts was for the year.

I had a 22.2% return for 2003. I am new to investing and thought that this was pretty good since most things that I read say expect the average of 10% return. This is much better than last year when I had a -2%.>>>>

TTRoberts: "The portfolio in my wife's 401(k) got +32.25% for 2003, but the year before it was a –10.8%. Like you, over the last 2 years I have “averaged” in the realm of 10%+. But over the last 4 years the average has only been +5.84%. So you see, just what kind of “average” you might have really depends on what segment of time you carve out of a list of variable returns. And I might add, you need to be very careful about your thinking about “average” returns using constant rate thinking.

For example, this 401(k) “average” rate of return was 5.84% over the last 4 years (11.33% -9.93% -10.3% +33.25%/4). The actual return over that period calculates out to be 3.55%. But . . . if I had earned 5.84% EACH year instead of it being the variable return as shown, the 401(k) would have had 5.5% more in it today."


Average when talking about stock returns typically does not mean arithmetical mean of yearly returns (11.33% -9.93% -10.3% +33.25%/4, in Ted's example).

Average when talking about stock returns typically means Compund Annual Growth Rate (CAGR), which is the "imaginary number that describes the rate at which an investment grew as though it had grown at a steady rate" of growth."

See http://www.investopedia.com/terms/c/cagr.asp

For example, assuming no further contributions (to be explained later), and account that gains 100% in year 1 but then loses 50% in year 2 has 2-year CAGR of 0!

Also, please be careful that your return calculations reflect ongoing contributions, so that you do not make the same mistake of overestimating returns, like the infamous "Beardstown Ladies Investment Club" and their editors, who wildly overstated the actual returns.

"Beardstown, Illinois, was home to a group of retirees who in the early 1990s claimed their investment club returned three times higher than the average by mutual funds and professional money managers. They were featured in press, on talk shows, and marketed in books and videos bearing such titles as: The Beardstown Ladies' Common-Sense Investment Guide - How We Beat the Stock Market and How You Can, Too; The Beardstown Ladies' Little Book of Investment Wisdom; The Beardstown Ladies: Cookin' Up Profits On Wall Street, etc.

It turned out that not only hadn't they beaten the stock market at all, but also their actual return was closer to nine percent a year for the period that they and the books bearing their name had touted 23.4%. At least one purchaser of the Beardstown Ladies' books was appalled that the book jackets, written by the commercial propagandist -- err, publisher -- touting the claims, were still being printed uncorrected even after their inaccuracies had been discovered."

http://www.insidervc.com/BeardstownVenturesPartAInstallmentTwo.htm

"Here's what happened. From 1983 to 1993, the Dow Jones industrial average recorded an average 15.73 percent return on stocks. Over the same period, The Ladies' claimed they beat the Dow Jones with a whopping 23.4 percent return.

Recently however, the Ladies discovered a “computer input error” that revealed falsely inflated profits. Instead of beating the market, the Ladies could show returns of only 9.1 percent — much better than a passbook savings account, but not even 2/3 of the Dow Jones."

http://www.afscme.org/publications/primetime/pt98203.htm

See also: http://old.better-investing.org/clubs/ladies.html

http://old.better-investing.org/clubs/from-the-ladies.html

The substantial number of books they sold and whatever related money they made therefrom is basically the result of fraud.

For your yoru calculation to be accurate, assuming that you are making ongoing contibutions, you cannot simply look at beginning of year and end of year balances and calculate a return. The end of year balance includes those ongoing contributions, but the simple calculation calculates them as gains (overinflating return) instead of as additional principal.

If you already new this, then my apologies for belaboring the obvious.

Regards, JAFO
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