S&P500 Actual Return vs Average Return?

Investing
#1

I’m talking with a guy that sells whole life insurance. I have no plans on buying any but I’d like to understand something he said about the difference between actual returns and average returns. The example might not be realistic but hopefully it makes sense.

Start off with $10K, invest for 4 years.

Year 1 - 100% return - $20K
Year 2 - 50% return - $10K
Year 3 - 100% return - $20K
Year 4 - 50% Return - $10K

Does this show an average rate of return of 25% and an actual return of 0%?
If so, is there a way to find the actual return of the S&P 500 compared to the average return?

Of course he’s using this as a reason I should take his 4-5% guaranteed return over the stock market’s average return, but I want to know what the difference is.

Thanks!!

#2

I honestly have no idea how to answer your question but run from this salesman and never look back. Whole life insurance policies are overpriced and unnecessary for 99% of people. Many of the numbers they will show you during their pitch are twisted to look more favorable. Do not listen.

This is coming from someone who previously owned a UIL policy.

1 Like
#3

So yeah, the bottom line is what @thberry10 said which is to be very skeptical of the insurance salesman.

But what he’s talking about is just a little oddity of math he’s using to instill fear in you in order to sell you a life insurance policy. What he’s saying is “If the market goes DOWN by 50% it has to go UP by 100% to get back to 0%”.

And yeah, that’s true, that’s how numbers work. If you start with $10,000 and get a -50% return (I think you forgot the minus signs in your above example) you end up with $5,000. Then you need a 100% return to get back to $10,000. That’s just how math and percentages work. So in the example you gave a 100% return followed by a -50% return twice, your total return is indeed 0%.

That said… ok, so? The number you really care about when looking at an investment return is the CAGR: Cumulative annual growth rate. Basically this is the rate that would get you from the beginning amount to the end amount if it were applied evenly over the time period. The CAGR for the US stock market over the last 40 years is about 11.5%.

He’s suggesting you take a guaranteed 5% (Guaranteed in so far as this specific insurance company is gonna actually pay you out one day and you’re not tripped up by one of the other traps or penalties in the thick rule book they made up and you have to sign).

Let’s see how that plays out.

$500/month @ 5% for 40 years = $741,262
$500/mont @ 11.5% for 40 years = $4,214,155

The difference is just shy of $3.5 million. Do you like this insurance salesman enough to forgo $3.5 million?

The life insurance has some other benefits for sure, like if you die early there’s a payout that would exceed what your investments would be by that point, but insuring your life is a separate issue. (i.e. does anyone rely on your income to live, it can be done dramatically cheaper, etc)

Remember, at the end of the day insurance HAS TO underperform the market because they’re not creating new investment value, they’re just shaving some off the top and giving you the rest.

https://www.instagram.com/p/CK__gDrnvBo/

1 Like