I visited the Social Security website recently and came across an interesting calculator. It told me, that on average I had twenty-two years and ten months to live.
Wow, that was disappointing.
This Life Expectancy Calculator was based on averages and in the small print, it reminded me that it did not take into account a wide number of factors such as my current health, lifestyle, and family history that could increase or decrease my life expectancy.
It’s a good thing that my doctor says that I’m abnormally normal; his funny way of saying most people are on medication by the time they’re my age. My lifestyle is good and my folks are still rocking it, in their eighties. I personally celebrate that I have the opportunity to be engaged in business each day.
A funny thing about averages is that they can provide insight, but they really can’t tell the entire story.
Investment averages kind of work the same way.
Let’s take this example.
Say, I have a million dollars. Hey, why not use a nice round number.
Say, I have a million dollars and over a year I am able to double it with a 100% rate of return. How much money do I have now? Two million dollars, right?
Then the very next year my value drops in half or fifty percent. Now, I’m back to the original one million dollars. What’s my two-year annualized rate of return? You’re probably thinking it’s zero; but, it’s not.
The actual number is that I had a two-year annualized rate of return of twenty-five percent even though I didn’t have anymore money to my name.
Let’s me walk you through the math. I had a 100% return the first year. The second year was cut in half, which is a 50% loss and the event happened over two years. So, I need to take that 50% and divided it by two, which is twenty-five. Hence my two-year annualized return was twenty-five percent and yet I didn’t make a dime, because my actual yield was zero.
So, when you’re quoted rates of return or life expectancies, understand where the numbers came from, as you research and plan your strategies; or better yet, speak with us, because this is what we study and understand.
Here’s to a long life ahead, as I plan to be relevant for years to come and here’s to crazy math.
[This information has been gathered from sources believed to be reliable, but Brooklight Place Securities, Inc. cannot guarantee the accuracy of this information or the reliability of these sources. This information in this Blog is not intended as legal or tax advice, consult your attorney or tax advisor regarding such matters.]