Financial myth:  If you want a better rate of return, you'll need to take on more risk. 

The truth is, the average compounded return in the stock market over the last 120 years is 5.2%, according to Crestmont Research.  The compounded rate of return in the S&P 500 over the last 21 years has been just 4.53%.  Thought it was higher?  That’s because the industry reports ‘simple’ averages, which may bear no relation whatsoever to actual returns.

Follow my math:  Between Dec 31, 1996 and March 9, 2009, the S&P 500 first went up 106%, then down 49%, up again 101%, then down 57% (per J.P. Morgan Asset Management).  That’s a lot of volatility (i.e., risk!).  It’s also an average return (simple, not compounded) of 8.24% over those 12+ years.  But if you owned the index from beginning to end, the value of the index dropped from 741 to 677.  That’s a loss of 9% in real dollars.  So why does the industry report an average annual gain of 8.24% over that period, when the average real (compounded) return was negative 0.73%?  

The big banks and the wealthy have hundreds of billions of their money in tax-exempt accounts yielding dividends of 4.5 to 6% every year, compounding year after year, virtually risk-free.  That’s a better return, with no income taxes and less risk.  Wanna play?  Set an appointment.