10/29/26
Let’s say someone tells you their investment averaged a 10% return over the last few years. Sounds pretty good, right? But if you asked how much their account actually grew, would the answer be the same? Not exactly! And this is where people can get confused when it comes to investing.
This is something that can get lost when we talk about investment performance. An average return is just an average, and doesn’t always show what happened to the actual dollars in an account along the way. An average return doesn’t necessarily tell you how much your account has actually grown. That’s because the market doesn’t move in a straight line. You can have a great year followed by a not-so-great one, and those changes can affect your money differently than you might expect.
Here’s an example.
Imagine you invest $100, and in year one, your investment earns 20%, bringing your balance to $120. Then, in the following year the market drops 20%. Your new balance is $96.
If you average those two returns, you get 0%. A 20% gain and a 20% loss average out to zero. But your account is actually down $4!
It’s because gains and losses don’t work equally. After losing 20%, you actually need a 25% gain just to get back to where you started.
Now, $4 might not seem like much, but imagine those same ups and downs happening with thousands of dollars over several years. The difference can become pretty significant.
This is why looking at the average return is only part of the picture. It’s just as important to understand how an investment performs during down years and how those losses can affect your ability to grow your money over time.
There are different investment strategies designed to help manage certain types of market risk, but no strategy is without its own limitations. The important thing is understanding how your money works, what risks you’re taking, and whether your approach lines up with your goals.
Don’t just ask what an investment averages. Ask what actually happens to your money along the way. Take a moment to review how your investments have performed over time and how those ups and downs have affected your overall growth.
If you’ve ever wondered whether your current financial strategy aligns with your goals, consider scheduling a free 1:1 consultation call. Sometimes, asking a few different questions can change the way you look at your money.
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