Chapter Six

“Things Are Not Always As They Seem”

Let’s assume you put $10,000 in a mutual fund (it makes no difference whether it’s inside a government plan, an annuity, a variable life policy, an equity indexed life policy, or bought directly) and it performs like this for 5 years:

You got a nice average of 10% per year. Fund history shows it and everyone agrees with the arithmetic. Now, not counting taxes and other costs let’s look at the real performance of that $10,000 at a straight level 10% per year compared to the actual performance. (Note: The results you see in these tables are before the costs of taxes, fees, opportunity costs, and inflation are deducted.)

The normal ups and downs of the stock market can devastate the actual returns of your investments. How many investments do you know of that have a level rate of return year after year? Yet, that is how they are reported and how they are presented to illustrate anticipated future value. You expected a gain of $6,105 and got $1,466. Called the “Monte Carlo Effect”, this makes the “Rule of 72” invalid for anything other than a fixed level rate of return over the measured time period.  

Caution: There are many investment plans that use S&P 500 Index averages or mutual fund averages (such as variable life plans, annuities, government plans, and dollar cost averaging plans) to project future values. When you impose actual results over the illustrated level average, the real results will always be less; often dramatically less. 40% less is common.

If anyone presents you with an illustration of future values using a level average rate over a period of time, know that it is not accurate and is a false measure of expectations.

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