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BUT, when you understand average rate of return you will know how misleading it can be.

For example... If I could get you a 25% average rate of return for the next two years would you want to invest with me?

Most people would probably jump at it... Right?

But let’s break this down.

Let’s say you give me $100,000 to invest for you.

And... In the first year we lose 50%...

In this scenario our investment has shrunk from $100k down to $50k.

Now, most people would think that our investment needs to go up by 50% for us to get back to break even.

But this is NOT true.

If your investment went up by 50% in year two our $50k would only be at $75K.

For us to get back to our break even we would need to get a 100% return on our $50K.

Now let’s look at this from an average rate of return perspective.

The average rate of return of -50% and 100% is 25% per year.

In this scenario your wealth has not grown AT ALL...

BUT I got an average rate of return of 25%.

This is what we call Wall Street Fuzzy Math.