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Investments like stock portfolios or traditional retirement accounts can actually hide losses and package them up as gains. Not many people know about this but in todays episode we’re going to talk about how these portfolio managers can actually lose you money and still advertise to you and the rest of the world that they made you money and at the end of the episode we’ll walk through a real world example.
Key Points:
1.[0:41-2:14] Manipulation of Averages:
a. Investment portfolios can obscure losses by manipulating average returns.
b. Fluctuations in volatile investments can lead to years of loss followed by gains.
c. Averaging losses and gains might yield a 0% average return, but it conceals actual monetary losses.
2.[2:14-2:31] Case Study - Real World Example:
a. Using a 10-year period in the stock market (2000-2010) as a case study.
b. Market experienced economic crises during this time, resulting in overall poor returns.
c. Averaging the returns might show a minor positive average, but the actual result was a significant loss.
3.[2:31-3:48] Importance of Understanding True Gains:
a. Averages can mask the reality of losses or subpar returns over time.
b. Investors should look beyond averages and consider actual dollar amounts gained or lost.
c. Positive average annual returns can still result in overall monetary losses, highlighting the need for careful analysis.
The episode emphasizes the deceptive nature of average returns and encourages investors to look beyond averages to understand the actual financial outcomes of their investments.