It’s all in the Math

Look out America, Misleading Marketing is everywhere. You may have seen a video on social media that showed a young woman walking through a major retail store on Black Friday. The sign hanging over a large television showed the Black Friday Deal price of $649. The young lady removed the Black Friday Deal price to reveal the Pre-Black Friday Deal price as $649. As you can imagine the video went viral through the internet. I refer to this as Misleading Marketing.   

As the title suggests, It’s All Math, a TV sold for $649 today and then sold for $649 tomorrow is not really on sale nor is it really a deal relative to the pre-deal/sale price. You can do that math rather quickly. 

I would also venture a guess that many of you believe that prices are increased right before a sale so that Misleading Marketing can tell you that you are getting a discount. If something costs $75 today and a store increases the price to $100 tonight and at the same time places that item on sale for $75 claiming a 25% savings, is the retailer really being forthright or is it misleading its customers? 

Let’s look at how Misleading Marketing takes aim at your investments. The chart below shows 2 different sequences of return.  The series on the left show a starting balance of $100,000 and a 25% rate of return, ROR, for 10 straight years. The balance starts at $100,000 and grows to $931,322. If you add up the rates of return and divide it by 10 years, you will have an average rate of return of 25%.

Now the series on the right shows the same starting balance of $100,000 but the rates of return alternate between positive 100% and negative (-50%) for 10 years. In this series the balance starts at $100,000 and ends at $100,000. The investor made absolutely no money YET, the average rate of return is also 25%. 

When it comes to your investments, averages mean nothing. The following is an example of Misleading Marketing: The stock market has averaged 25% over the last 20 years. Therefore, if we put your money into the stock market we can expect an average rate of return of 25% for the next 20 years and you will have a lot of money.    

Believe me when I tell you, you can average 25% in the stock market and lose money. 

It’s All in the Math.