Stock Market Math

Chapter 4 Long-Term Trends: Patience Rewarded

The methods by which returns are calculated can be deceiving. When you look at the long-term outcome of an investment, how can you decide whether a particular investment has been better than average, or worse? To get the answer, you need to look at compound return on investment over many years.

For example, everyone has heard promotions by mutual funds claiming incredible returns if you had invested $10,000 on a specific date 20 years earlier. You may read that “if you had invested $10,000 exactly 20 years ago, it would be worth more than $26,500 today.” As good as this may sound, there are several problems with the claim:

1. The fund picked a specific date. If your timing is poor and you invest your ...