Investment Return, be careful of the numbers pitfall

Table of Contents

Two examples of investment return

“Statistics can be deceiving“, I have two examples here. I saw a new book in a bookstore. It was published by a university finance scholar in Taiwan who works as a consultant for a government fund. The book cover emphasizes that this financial scholar invested in a market value ETF for 20 years and achieved an “amazing rate of return” of 5 times.

A friend of mine who is the same age of me, boasted at a gathering of mutual friends that he started investing in US stocks in 1995 and has made about five times the return so far. This immediately caused a commotion among the friends at the table, and there was a constant stream of admiration and praise.

Both of these examples make the same mistake I wrote in “An investor success can be sustained or not? how to verify?” and “Checklist to see if your return on investment is good or not?“:

What is mentioned is the total rate of return, a five-fold return. For general public, a five-fold return is of course very good. However, everyone forgets how long the investment period is. The annual rate of return (please use the “Investors should care annualized rate of return (IRR), How to calculate?“) is the only reference standard.
In the first example, after investing for 20 years, a total return of 5 times was obtained; the annualized rate of return during the investment period was only 8.36%. The annualized rate of return of the Taiwan Weighted Index (please use the “Querier to Annualized rate of return for Taiwan Stock Exchange” for query) in the past 30 years excluding dividends is 8.25%!
In the second example, after investing for 29 years, a total return of 5 times was obtained; the annualized rate of return during the investment period was only 5.71%. The annualized rate of return of the S&P 500 Index of US stocks over the past 30 years (please use the”Querier to Annualized rate of return for S&P 500 Index” for query) excluding dividends is 8.12%!

“Statistics can be deceiving“, Do you still think that the above two examples of seemingly making a lot of money have good returns on investment?

Fund company tactics

Mutual funds or financial management companies love to brag about how good their fund returns are in order to attract uninformed investors. The methods they most often use are:

We only talk about the rate of return, not three, five, ten, or twenty years. If it is not the rate of return for more than ten consecutive years, it has no reference value at all.
Is it the rate of return for those consecutive years? Should we omit the periods in between or before and after when the returns are poor?
Are other mutual funds with better or worse returns deliberately combined or split out during the period of return cited to improve the numbers?

Now you know why the rate of return figures proposed by mutual fund companies look so attractive?

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