Page 64 - Ready Set Retire

Stephen J. Kelley

Math vs. Money

Figure 9: Math vs. Money--the impact of losses

How can this be? How can a fund with an average 10% rate of
return do so poorly with respect to a fund with an average
2.5%? It doesn’t make sense, does it?
First, let’s define rate of return. If a pool of money goes up one
day, down the next, up the following, etc., is it providing a real
rate of return? Wall Street says yes. I say no. Not until you sell
the asset. I don’t believe a return is a return until it’s locked in.
Unless it’s actual money.
The “money” you have in the market isn’t. It’s not actual
money. Its shares of stock or bonds or some other security. It’s
not money until you sell it, then you have a cash balance. Cash.
Real money, but money that isn’t working for you. So, to get it
to work for you, what do you do? Reinvest. Now it’s not
money anymore and the gains and principal are again at risk.
Any gains you receive are subject to drawdown at any time.
That’s not what I consider a rate of return.
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