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This week, David discusses the history of  The three market periods. David discuses the importance of understanding the difference between average rates of return and actual rates of return. In the financial word this is known as Compound Annual Growth Rate (CAGR) or Real Rate of return. Understanding the difference between these two will help you understand why so many people do not realize the returns or the gains that they expected in terms of the real dollars that they accumulate. Much of the financial world speaks in terms of average rates of return. The problem is, that average returns do not determine how much of your money you get to keep at the end of the journey.  In the real wold, it is the actual rate of return(CAGR)  that determines what you end up with. When you participate in all of the losses in the down years, it has an enormous affect on the actual dollars you will save.

 Note, all of the returns below are BEFORE the eroding effects of taxation or management fees. This substantially reduces the actual or REAL rate of return that one receives on their savings.

During the first market period the actual rate of return on an initial lump sum investment from 1901-1979  would have given you an actual rate of return of 3.57% (Down Jones)

The second market period was the longest running bull market in the history of the markets. There were two key events that caused such growth. The primary reason was the introduction of the qualified plan (401k). For the first time in history millions of Americans were dumping there money in the stock market via payroll deductions and yet were provided NO guarantees. This meant that for the first time hundreds of millions of dollars were flooding the market for the first time in history. There is a direct correlation between the introduction of the 401k and the sharp increase in market growth during this market period.  Prior to this point, the majority  of Americans were not speculating on Wall Street. In fact, in the 1950's the average American had less than 3% of the savings financial vehicles that offered no safety of their principal or guarantees.  Tune in to hear David talk about the 2nd event in history that contributed heavily to the growth during this time period.

The third market period is very telling. Many people have already forgotten 2008. Participating in market losses has an enormous negative impact on your savings. If one had all of the life savings in the sock market let's hope they weren't planning on retiring in 2008!

Below is the S & P 500 (with Dividends) for the last 50 years (1962-2012) At first glance you might think that the there's no big difference between the Average and ACTUAL rate of return. Let's assume that a $10,000 lump sum was invested in 1962-2012 which results in an average rate of return of 10.6%  and an ACTUAL ROR of 9.19% during this 50-year period. This would mean you end up with $811,229 (before fees and taxation). If you received an REAL rate of return of 10.6% (vs. Actual 9.19%) during this time period, you would end up with: $1,540,836!! That's a difference of:  $729,607!! This is validated with a simple future Value financial calculator (see below)

Lastly, if this same $10,000  lump sum was invested in 1962-2012 one was in the 33% tax marginal tax bracket during this period, it would reduce their ACTUAL rate of return to: %6.47 which would mean you would end up with just: $230,035!! This is a far cry from the $1.5 million that the 10.6% that so many confuse with Real returns.  Therefore the 10.6% average rate of return after taxation resulted in $230,035 real dollars that you could spend, NOT $1.5 million. What if this account were subject to management and market based fees? If we assume a this is just 1.5% (see The Hidden Cost of Doing Business, and The Hidden Cost of Mutual Funds) then the REAL rate of return falls to: 5.37%  in which case the 10.6% average rate of return would provide you just $136,929. If you received an REAL rate of return of 10.6% vs. Actual 5.37% (based on assumption above) during this time period, you would end up with: $1,540,836!! NOT the $136,929 (Actual Rate of Return).   The reasons above are why so many Americans gambling their entire life's savings in the market never realize the substantial savings they had hoped and prayed for.

David can be reached at: (800) 559-0933 or [email protected] or visit: InfiniteFinancialServices.com