Average returns or Compound returns? What’s the difference?

There are two basic methods of calculating the returns in a portfolio by averaging or compounding and understanding the difference between them is crucial to your investment approach and also in comparing fund returns.  

Slide1.jpg

Average Return Definition 

What Is the Average Return?

The average return is the simple mathematical average of a series of returns generated over a period of time. An average return is calculated the same way a simple average is calculated for any set of numbers. The numbers are added together into a single sum, and then the sum is divided by the count of the numbers in the set

First, realize individuals cannot spend average returns.  Second, Average returns are often quoted when looking at mutual funds or portfolio manager past performance.  

Here is an example.

Lets say you now have $100,000 you would like to place in the market using mutual funds or managed funds. 

The first year assume the market corrected -50% after you had invested your money, so that your account is now worth $50,000 at the end of the year. 

In year two, the assume the market goes up +100%, so your money is now worth $100,000 at the end of the second year.

To find the average return, you had the two returns together.  (-50%) + 100% and get "50%" 

Now you take that number "50%" and divide by the number of years in this case 2 years.  So 50% divided by 2 = 25%.  

It is accurate to say that the average return for this example has been 25% for the past two years. Although most everyone I know, would say that they had made nothing.  The started with $100,000 and two years later had $100,000.

Compound Return Definition 

What is the Compound Return?

The compound return is the rate of return, usually expressed as a percentage that represents the cumulative effect that a series of gains or losses has on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.

When investors think of their money growing they think of compound returns.


Charitable Contributions from IRA

Older than 70 ½?  Making qualified charitable distributions from your IRA could save you money

Qualified charitable distributions (QCDs) from individual retirement accounts have risen in popularity.  These QCDs allow seniors older than 70 ½ to make a direct transfer to charity, rather than taking their required minimum distribution (RMD).  Gifts are allowed (up to $100,000 total) in lieu of or in addition to their RMDs.  This is an annual allowance.

QCDS PROVIDE THE EQUIVALENT OF A CHARITABLE TAX DEDUCTION, EVEN WHILE CLAIMING THE NEW STANDARD DEDUCTION.

Seniors over 70 ½ who might otherwise receive no tax deduction for their charitable gifts because of the new standard deduction can receive a tax benefit by making QCDs from their IRA accounts. 

The Tax Cuts and Jobs Act may make it difficult for taxpayers to receive a benefit for their charitable contributions.  If total itemized deductions fall below the new standard deduction threshold, taxpayers will simply receive the standard deduction.  However, charitable seniors can effectively create a charitable contribution by making a QCD from their IRA account in lieu of their RMD.

For example, rather than taking a $5,000 RMD, seniors can arrange to direct the $5,000 to the charity of their choice, which has the same effect as a charitable contribution.  It satisfies their charitable intent and allows them to avoid paying income taxes on the RMD amount, while still receiving the benefit from their standard deduction.

QCDS CAN REDUCE TAXABLE INCOME

The QCD will reduce the taxpayer’s adjusted gross income (AGI).  In addition to lowering the overall tax bill by reducing Individual Retirement Arrangement (IRA) income. 


Second Marriages

YOURS, MINE AND OURS: ESTATE STRATEGIES FOR SECOND MARRIAGES

If you are one of the many Americans who are in a second marriage, you may need to revisit your estate strategy.

Unlike a typical first marriage, second marriages often require special consideration that should address children from a prior marriage and the disposition of assets accumulated prior to the second marriage.

SECOND MARRIAGES

Here are some ideas you may want to think about when updating your estate strategy:

  • You may want to ensure that your children from your first marriage are set up to receive assets from your estate, even as you provide your second spouse with adequate resources to live should you die first.

  • Consider titling of assets. Assets that are jointly owned in your name and your second spouse’s name are set up to pass to your second spouse, often regardless of any instructions in your will.

  • If you are designating your second spouse as beneficiary on retirement accounts, remember, once you die the surviving spouse can name any beneficiary he or she chooses, despite any promises to name your children from a previous marriage as successor beneficiaries.

  • Consider any prenuptial and postnuptial agreements with a professional who has legal expertise in the area of estate management.

  • If your new spouse is closer in age to your children than to you, your children may worry that they may never receive an inheritance. Consider passing them assets upon your death, which may be accomplished through the purchase of life insurance.²

  • Consider approaches to help protect against the drain extended health care may have on assets designed to support your spouse or pass to your children.

Roth + Company are not lawyers and cannot provide you a legal advice or legal opinions.  We recommend you contact an Attorney that specializes in the area of law for your individual situation and retain them to receive your legal advice.