The most misunderstood & vague word in Personal Finance is Average Returns. It is very common to think of Average Returns as (just) Returns. But these two words mean & signify a different picture.

Let’s check this in today’s article and how it impacts your thinking.

First Know Average, Then Average Returns

Let me begin you with asking a riddle!

Assume your height is 5 ft 5 inches. You do not know swimming!

Can you cross a river with an average depth of 4 Feet?

Just think…

Most of us will say why not? My height is 5.5 and the river is just 4 feet.. I will just walk over!

But you did not pay heed to the word “Average Depth”.

I am talking about this river.

You must have got …

Mathematically Word Average means – the number you get when you add two or more figures together and then divide the total by the number of figures you added.

So the average of 2 & 4 is =3

So average somewhere lies between lowest & highest value under consideration.

You can call it mean value.

So What does average returns mean?

When your favorite TV anchor or blog mentions the word Average Returns – he is talking about low returns too. He is actually adding the low values and high values and dividing them with the number of years of returns he is talking about.

How Average Returns is Misunderstood or Misrepresented

Financial Advisor: Many financial intermediaries will show you 2 types of returns… last one year and average returns of say 5 years or 10 years.

You will love to read this too Concept of Nominal Returns Vs Real Returns

In a year like 2021, both the returns will be very positives. But actually, by doing so, the intermediary has hidden returns of 2014 – 2015 which were negative.

This does not mean it is a bad investment. The only thing is you should know the movement of this particular scheme which comes out due to underlying asset – Equity or Shares.

Investor: When Advisor is Saying “you can get 12% Average Returns in next 10 Years” – you think he is saying this: