140. What’s the Difference Between Average and Actual Rate of Return

Jan 25, 2023

Rate of return

Investors use rate of return to make decisions and evaluate performance all the time, but they often get misled by the average return. With the market showing some positive signs to start the new year, this is a timely topic to discuss on the podcast and we’ll do that by exploring a Kiplinger article about rate of return that we featured in our Weekend Brief.

 Laura Stover, RFC® and Michael Wallin, CFP® will sort out the differences between the average and actual rate of return to make sure investors know which to use when building a properly diversified portfolio for retirement. It’s not what happens in a short duration, short period of time that you need to focus on. Instead, you want to look at your average rate of return for an extended period. That way you can evaluate solutions during a down market that will help you get back on track for the rate of return necessary to make your plan successful.

 So we’ll walk you through how we integrate rate of return into the Redefining Wealth® process and show you why the bucket strategy and time horizons also play a key role in determining your investment strategy.

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Timestamps (show notes):

5:32 – How is average rate of return calculated?

7:47 – Why average rate of return can be misleading for investing.

10:57 – Calculating actual rate of return

14:32 – Sequence of return risk

19:18 – Millenials have a different perspective

21:36 – Measuring your capacity for risk

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