We all want our retirement savings to grow, right? When we look at investments like the stock market, we often hear about average returns over long periods. But what if those averages don’t tell the whole story? The book “Stress-Free Retirement” by Patrick Kelly shines a light on what the author calls “The Big Lie” about misleading stock market averages.
According to the sources, sometimes this “lie” is told so well that even those sharing it believe it’s true. The author suggests that the “‘average’ return reported by financial companies are not reality. They’re just smoke and mirrors.
Here’s a simple way the book illustrates this point: Imagine you invest $1,000.
In Year 1, the market goes down, and your investment has a negative return of -50%. Your $1,000 is now worth $500.
In Year 2, the market goes up, and your investment has a positive return of +50%. That +50% gain is on your current balance of $500, bringing your account value to $750 ($500 + $250).
Now, if you calculate the average return over those two years, it’s (-50% + +50%) / 2 = 0%. Pretty ho-hum, right? But look at your actual money: you started with $1,000 and ended with $750. You didn’t break even; you actually experienced a 25% loss over the two years, even though the average return was zero percent. This powerful example shows how just looking at the average can be completely misleading about your actual return.
This leads us to a core principle presented in the book: “Never Underestimate the Power of Zero”. The author argues that this simple concept, “Never take a loss,” may be the best investment advice you could receive. Seriously, the sources state that if you followed this one principle, you’d be way ahead of most of your peers.
Why is avoiding losses so crucial? The book demonstrates that eliminating those negative years in your investment journey significantly impacts your long-term wealth accumulation. The sources use hypothetical scenarios based on market indices like the Nikkei 225 and the S&P 500 to show this impact. For example, one illustration shows how simply eliminating negative years in the S&P 500 index performance from 1999-2011 resulted in a cumulative gain of 36.1 percent instead of a 14.4 percent loss over that 12-year period, even with a hypothetical cap on gains.
The takeaway is clear: While chasing the highest possible returns sounds appealing, the reality of market volatility and the mathematics of losses mean that protecting your downside and aiming to never experience a negative year can be a much more powerful and peaceful path to a secure retirement.
Thinking about “The Big Lie” of misleading averages and embracing the “Power of Zero” can fundamentally change how you approach saving for your stress-free retirement.
Ready to discuss your retirement goals and learn more about strategies focused on protection and achieving a “Stress-Free Retirement”? I invite you to schedule a time to meet with me, Dawn OBrien.
