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Don't Be Fooled by Average Returns!

April 06, 2023

For many investors, achieving the highest possible rate of return for their portfolio is the ultimate goal. It's understandable since the higher the return, the more they can accumulate for important life goals, such as saving for college or retirement. However, it's not necessarily true that achieving a higher rate of return over time guarantees a higher portfolio value compared to an investor with a lower return.

In reality, relying solely on the rate of return as a measure of success is oversimplifying the picture. While it's undoubtedly important, managing the risk associated with an investment portfolio is equally critical. To demonstrate, consider the illustration above. It shows that a portfolio with a lower rate of return can actually result in a higher portfolio value after ten years compared to a portfolio with a higher rate of return.

This highlights the fact that there's no one-size-fits-all approach when it comes to investing. Investors need to consider their unique goals, risk tolerance, and investment time horizon to determine the most appropriate strategy. While high returns are attractive, they often come with higher risks. Therefore, it's essential to strike a balance between risk and return that aligns with your investment goals.

In conclusion, while achieving a high rate of return is desirable, it's not the only measure of success when it comes to investing. Managing risk is equally important, and striking the right balance between risk and return is the key to long-term success.