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Posted On: 01/20/2024 5:42:16 AM
Post# of 27263
Why 12% is an optimistic benchmark
There’s a reason that 12% tends to be used as a benchmark, according to Blanchett. The average historical return from 1926 to 2023 is 12.2%, according to a monthly data set called stocks, bonds, bills and inflation, or SBBI.
But that is based on a simple arithmetic return, which may not accurately reflect all fluctuations, according to Blanchett.
For example, if you have $100 and your portfolio goes up 100%, you now have $200. But if it then goes down 50%, that brings you back to $100. The average return, by taking the 100% and negative 50% returns and dividing by two, would be positive 25%. Yet your realized return would be 0%, as you are back to your original $100 balance, Blanchett said.
Another more complicated calculation used by experts, known as compounded or geometric returns, would better account for those fluctuations, he said.
“It’s just the impact of negative returns that hurt you so much,” Blanchett said.
There’s a reason that 12% tends to be used as a benchmark, according to Blanchett. The average historical return from 1926 to 2023 is 12.2%, according to a monthly data set called stocks, bonds, bills and inflation, or SBBI.
But that is based on a simple arithmetic return, which may not accurately reflect all fluctuations, according to Blanchett.
For example, if you have $100 and your portfolio goes up 100%, you now have $200. But if it then goes down 50%, that brings you back to $100. The average return, by taking the 100% and negative 50% returns and dividing by two, would be positive 25%. Yet your realized return would be 0%, as you are back to your original $100 balance, Blanchett said.
Another more complicated calculation used by experts, known as compounded or geometric returns, would better account for those fluctuations, he said.
“It’s just the impact of negative returns that hurt you so much,” Blanchett said.
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