Wealth & Wisdom
Defining Moment Series
Learn What Is True and What Is Not True
If something you thought to be true was not true, when would you want to know about it? In today’s world with all the information from the media, radio, TV, and websites, the truth can be redefined and actually be transformed into something that is not true. One lesson has become: If we repeat something over and over again, it will become so ingrained in our minds that it must be true. Marketing companies use these tactics when marketing their products.
So does the financial-services industry. Politicians have mastered the art of double talk, misstatements, misinformation, and repeated lies. They are under the delusion that we believe them and the mistaken impression that we need them. The media feeds us a relentless amount of garbage.
It has become nothing more than “wannabe” actors giving their opinions, and trying to shape society to their image. All of this of course is my opinion, not fact. In opinion, you can agree with me or not. Either way, it is okay. A myth is sort of funny. It is an idea that can be proven somewhat true on one hand and proven false on another.
Typically, myths occur when the results are not predictable by fact. Fact can become myth as new things are discovered and learned. Mankind knows a lot about what it knows, and very little about the rest. Heck, it took us a long time to get over the idea that the earth was not flat. I am afraid that we are going to have to get over a lot of other things we think are true, but again, that is just my opinion.
When it comes to myth, one’s opinion may become more compelling than actual facts involved. Someone declaring that a newborn baby is ugly will never convince the mother of that baby that her child is ugly, even though in a cute sort of way, it is. Myth is something that can be argued with a combination of fact and opinion. Whether it is true or not is in the eye of the beholder.
What if you realized you could make a lot of money selling a product that would not do exactly what it was advertised to do, but your advertising was so compelling that people bought it anyway? Selling this product made you rich. Would you ever feel compelled to tell, as they say, the rest of the story about how the product you sold might not work? The truth is: probably not.
The reality is we probably buy a lot of things with a little bit of myth attached to it. A fact is a fact. It is what it is. Someone saying it is cold outside (opinion) is different from someone saying it is 20 degrees Fahrenheit outside (fact). An Eskimo may not think 20 degrees is very cold when the person from Florida might be shivering. I know, from the medical knowledge that we now possess, that I am going to die someday. Now I don’t mind dying, I just don’t want to be there when it happens. But, I will die. That is a fact.
Now here is a new phrase. It may be “logical and reasonable” to assume, since it is a fact that I am going to die, that I also might live a long time based on information that is medically known about me. One could argue that I could die b accident at any moment. So, my living a long time could be somewhat of a myth. Does all of this sound confusing? Yes, because it is. We get all of our information on different levels of myth, opinion, fact, and truth. It is not impossible to get various amounts of all four when discussing anything. We get all our information from different groups who represent different things and have different agendas. More knowledge and more education will help you cut through the difference between myth and reality, fact and fiction. Learning what is true and what is not true can be complicated.
The difference between what is happening and what is not happening can also be alarming. As an example, let’s say someone invested $1,000 over time and received an average 20% return for two years. How much would that person have at the end of two years?
C. $ 800
D. $ 0.00
Many people with calculators will answer that the person would have $1,440. That is correct. A 20% rate of return compounded annually for two years is $1,440. So, what this person heard from his planner or read in a prospectus, newspaper, or magazine article about the 20% average rate of return may cause someone to assume that they have accumulated $1,440.
That was pretty simple, right? But let’s take a look at answer B, $1,280. If someone invested $1,000, and in the first year, they received a 60% rate of return and in the second year they lost 20%, they would have still averaged 20% for two years, but in the end they would only have $1,280.
So, answer A and B are both right. Now, I am starting to think, if A and B are correct, I better look at answer C too. If someone invested $1,000 and in the first year received a 100% rate of return but lost 60% in the second year, they still averaged 20% a year, but the result is dramatically different. They would only have $800. Wow, how can a simple question have so many answers? Now I hate to do this, but let’s look at answer D, $0.00. If the investment of $1,000 received a 140% rate of return in the first year and then lost 100% the second year (one hundred percent loss means you lost everything), you would still have an average of 20% for two years but have no money left.
Holy cow, understanding what is true and what is not true, all of a sudden, got really complicated. No wonder people are confused. It wouldn’t surprise me if some companies try to confuse you on purpose. Their marketing proudly advertises that their investors have received an average 20% rate of return over the last two years. Sounds good, right? Everyone must learn to pay attention to what is going on. It is critical.
Average vs. Actual
In trying to decipher what is true and what is not true, common sense and reality can take a back seat to marketing hype. Sometimes things that are happening in your everyday life can be confusing, such as rates of return. Look at the average rates of return compared to the actual rates of return in the Dow Jones Industrial Average. From 2000 through 2014 the yearly average of the Dow was 4.29%.
If you had invested $1,000 at the beginning of 2000 and received an average rate of return of 4.29%, by the end of 2014, you would have accumulated approximately $1,879. Here is the funny part, if you actually had invested $1,000 in 2000 and kept your money in the Dow until the end of 2014, the amount of money you actually accumulated was approximately $1,575. That calculated to a 3.08% return on your money. That difference represents a 39% disparity between the average (4.29%) and the actual (3.08%) rates of return.
Understanding the math calculations is simple. If you have a 4.29% average for fifteen years, every year there is a positive number to calculate. The reality is there were some negative-return years during that seven-year period. If granddad would have invested $1,000 in 1930, the average for the Dow from 1930 through 2014 is 6.31%. At 6.31%, that $1,000 would have grown to approximately $142,000. The actual rate of return in the DOW during that time frame was 4.31%, so what he actually accumulated was approximately $30,000. That is approximately a 79% difference between the average and the actual rate of return in the DOW during that time frame.
Once again, the perception of what we believe to be true and what is really true could surprise you. What you have to learn and understand is that the statement that the Dow average of 6.31% from 1930 through 2014 is TRUE, but it does not represent actual results.
You’ll Probably What?
As I discussed before, one of the most common financial phrases that has been driven into our heads over the last fifty years is: You may retire to two-thirds of your income, thus be in a lower tax bracket. If this is the wisdom of traditional thinking for lowering your taxes at retirement, one could conclude, with the same thought process, “I’m not saving for retirement, so I won’t have to pay any taxes.” This is what I call “the problem controlling the outcome” type of solution.
The idea of reducing someone’ income to reduce taxes is a simple goal to achieve for some amateur planners. Too much time is being spent on the thought process of planning for controlled failure. By ignoring the changes that we may be facing in the future, the declining benefits, the increasing taxation, aging population, and a smaller tax-paying work force, retiring to two-thirds of your income is not a choice, it is a mistake.