Average Annual Return Means Dick....

The average annual return on any financial document means dick what you really need to look at is what was the yield. Many people forget that these are completely separate items for example.


I am going to invest a $5,000.00 and watch it grow in a high risk mutual fund over four years.

Year.. Return.... Amount
1..... 100%..... $10,000.00
2..... -50%..... $5,000.00
3..... 100%..... $10,000.00
4..... -50%..... $5,000.00

My average annual return is (200-100)/4 = 25%
My Yield is.....drum roll........ 0!

Which number is on the prospective?

Which number do you actually car about?

If you factor in the time value of money with inflation and fees from the fund you would actually have a negative yield. But since this example used semi unrealistic numbers in the rates of return to simplify the example, it should also leave out the additonal detail.ical.

So next time you are sitting with a financial planner or looking at a fund say that is nice rate but what is the take home yield after Inflation and Fees.... after all that is what you really care about.

You will start to notice funds that might not have high rates of return every year but with dividends, cash flow, etc. they will have a yield that is much higher then those funds you are investing in with much less risk.