Page 60 - Ready Set Retire

Stephen J. Kelley

Ready Step 5: Bust the Myths

Myth #1: Average Rates of Return Matter

Here’s an example of an industry falsehood. Assume you have
$100,000 and the market goes up by 10% next year. How much
money do you have?
“Easy,” you say: “$110,000.”

$100,000 x 1.1 = $110,000
“Right,” I say. “What’s yer point?” you say.
Okay, stay with me for a moment. Assume the next year it goes
down 10%. How much do you have now?
“Easy,” you say, poking me in the eye: “$100,000.”

+10% - 10% = 0. $100,000 x 1.0 = $100,000
“Not so fast,” I say, blinking rapidly.

$110,000 x .90 = $99,000, not $100,000!
See, when markets go up, the gain is added to your principal.
You don’t get the calculated gain plus a corresponding growth
of principal (huh?).
But when markets go down, your gain and your principal are
both attacked. A 10% loss is always more impactful than a 10%

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