Page 14 - Exposed Final

Chapter Three: Waiting on Wall Street's Average Rate of Return

One topic that is always the center of attention is the average rate of return

on a particular investment. The historical rate of return is how most people

select their investments. I can't count the number of times people have said

that their selection method for investments is past performance. Yes, you

need a reference point, such as historical performance, but even Wall

Street warns that past performance does not guarantee future

performance. (It’s their nice little built-in legal protection disclaimer, so that

when you lose half your wealth they can say that they informed you in

advance.) Nevertheless, almost every marketing piece produced by Wall

Street implies that past performance is critical to making future investment

choices.

For example, when you hear about a hypothetical investment reporting an

average rate of return of 10% over the last 20 years, it makes for great

dreams of accumulating wealth quickly and easily.

There are dozens of financial software programs for individuals and

financial advisors. For the most part, they all work the same; you input an

expected rate of return and the software produces an output as if the rate

of return happened repeatedly every year. I think you will agree whether

you use 7%, 8%, or 10% as a projected average annual return, I can
guarantee you that you will not earn the exact same return every year.