Comments on: When Returns Lie

By: When Returns Lie Part II « Evolution of Wealth

When Returns Lie Part II « Evolution of Wealth — Thu, 10 Sep 2009 22:22:09 +0000

[...] Tags: investing, investments, lies, Misinformation, mutual funds, rate of return Did you read When Returns Lie? This will be a continued discussion so make sure you read where it started and check the [...]

By: Evolution Of Wealth

Evolution Of Wealth — Thu, 10 Sep 2009 10:29:26 +0000

You’re making my point!
Great! I hope people were able to follow along and understand that walkthrough. I guess I was hoping I wouldn’t get bashed along the way but I put myself out there. The point of this blog is to educate and teach people about misinformation in the financial world. I think the arithmetic average is a great example of misleading information that is being shown/pushed around when performance is calculated. It is not accurate and thank Paul for pointing that out so nicely.
Here is a link to a great investopedia article talking about the differences: http://www.investopedia.com/articles/08/annualized-returns.asp

By: paul escobar

paul escobar — Wed, 09 Sep 2009 20:06:07 +0000

Ok, well I hate to debate with you. (no, really i don’t).

First, you ain’t no finance professional.

Second, you cannot take an arithmetic average of percentage returns and get the average return. If you do, and then you compound the arithmetic average you get bizzare results.

To get an average of the numbers you put up, you add “one” to the percent then MULTIPLY the numbers to and take a ROOT to get the geometric average.

So, in your example, the average compounded retturn for CWGIX using your data above is 3.95% NOT 7.13%. So, now we know how CWGIXs growth of a dollar underperformed the other funds.

GEEZ.

By: Evolution Of Wealth

Evolution Of Wealth — Wed, 09 Sep 2009 19:25:22 +0000

Paul

I love it when people look into my math, I’m only human. However, that’s not how I calculated the dollar value. What I did is take the annual return for each you and calculated it that way. So for instance CWGIX had a 7.13% average annual return over 5 years. The annual returns were: 19.42%, 14.72%, 22.36%, 17.52% & -38.38%. So when I took $10,000 and this series of returns the dollar value was $12,139.17. I did these simple calculations in excel and got the performance numbers from http://finance.yahoo.com/q/pm?s=CWGIX

I hope that helps explain it. Thank you for your question and please let me know if you have any more.

By: paul escobar

paul escobar — Wed, 09 Sep 2009 19:10:53 +0000

um, you got something wrong there.

Let’s assume the annualized rates of return you have there are gross of other expenses; as you point out, there may be assorted sales charges on the funds you have picked.

And, the $ value you have there, we’ll assume is given as an after-fee number. Why do I assume this.

Well, let’s look at the 1st fund there, earning a 5.16% return. To compound this rate of return, you multiply it by itself 5 times for the 5yr return, thus: (1.0516)^5 = 1.2860 times by $10k and you have your $12,860.

Let’s look at the next fund, with a 7.13% annualized return. Again, 1.0713 times itself 5 times, is 1.4131; not 12139. the explaination is that an investor in that fund would have paid $1992 in “fees” somewhere.

Conclusion, either the rates of return are GROSS of fees and the $ figures are net, or something of that ilk, or you simply pulled incorrect data for your table.