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Debunking Cringy TikTok Financial Math. TikTok has some pretty cringy financial advice, but this terrible math may take the cake. These TikTokers, often people trying to sell terrible financial products, use this terrible math to explain how the markets aren’t as good as investors and Wall Street may claim.
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Transcript
so one of the most common arguments that
I hear when we’re talking about anything
debunking anything is people will
respond and say you don’t know enough
about this topic you haven’t researched
enough you should go read X book you
should go watch xvideo you should go see
you know X thing and when I respond back
and I ask like what is it what’s the
thing that I’m missing what’s the
information I need to finish this
thought process out they can’t answer
the question what that tells me when
someone makes that an arguing point is
that they trust this person of authority
and they think this person of authority
must be telling them the truth therefore
since I’m arguing against it I must be
wrong and they don’t trust what I have
to say because they’ve already trusted
this person of authority which is fine
you know everybody by default kind of
collects people of authority that they
believe in and they get behind and they
argue for and that’s totally okay the
thing that I would challenge these
people on is if you cannot articulate
yourself what it is that makes sense
financially like what the item is that
I’m missing then I would recommend that
you don’t actually invest in that
product if you can’t wrap your head
around it enough to be able to explain
to someone else like this is the thing
that you need to do in order to move
forward don’t recommend that product to
other people and you shouldn’t buy that
product yourself go find the data go
find the missing information yourself
welcome back friends and family before
we get into it please make sure to smash
that like button for the YouTube
algorithm it helps us out tremendously
we’re a couple of average
idiots I guess you could say that come
from humble beginnings we were in the
Marine Corps at some point and through
our own research and figuring out this
stuff through our own experience we
figured out how to build good wealth and
consistent wealth over time and we want
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you at no cost we’re not trying to sell
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good conversation about what average and
ordinary people can do to become wealthy
and by liking and subscribing you’re
helping us spread as much of this good
information as possible so thank you so
much for all your support and I greatly
appreciate it so there’s this argument
that I’ve heard and a lot of times it
comes from people who are selling things
and also from other people who aren’t
selling things I think this is just a
hard concept for people to wrap their
minds around and if you’ve been in the
personal finance space for a minute
you’ve probably heard this before and
it’s probably thrown you for a loop it’s
through me for a loop I do a lot of
numbers and stuff for a living so it’s
not anything to be ashamed of but we’re
gonna break down exactly why these
arguments don’t work I’ve got a couple
of tick tocks I found some people who
make this argument so that we can
actually see what it is they have to say
will use their own numbers so we could
prove that their argument doesn’t make
any sense so let’s take a look at those
and I’ll catch you on the other side
when it comes to an example a very
simple example let’s just say you start
off with a hundred thousand dollars in
your account and then something like 911
happens or 08 happens or worse than
market crash in history it’s down 50 now
in year two instead of a hundred
thousand you have 50. in year two what
happens usually when we have recessions
we have expansion let’s just say it’s
springboards right back off the
trampoline and now you make a 100 return
so that means you’re back up to a
hundred thousand right so Shannon how
much did you earn but what was your
average rate of return that advisors are
always telling people you know with
Aaron if you divide those out you get 20
25 I’m sorry 25 is your average rate of
return now I sold you a bill of goods on
guaranteeing you a 25 return if I told
you in the beginning of all this hey
look if I show you
an illustration that has a 25 guaranteed
average return how much would you give
me for that everything I have okay so
now I just showed you a way of
displaying an average rate of return but
you actually earn nothing oh boy let’s
leave it to the infinite banking
specialist to give us terrible financial
information and not be able to math
all right let’s hit another one this is
the difference between average and
actual let’s say you have a hundred
dollars and you invest in something that
goes up 50 one year and then down 50 the
next year you have averaged zero percent
but what your money actually did is went
up fifty percent the first year and then
the next year it went down 50 your money
actually gave you a return of negative
25 these are two completely different
numbers what’s more important to you
your average return or your actual
return
on this one she’s so close she almost
got it but then she missed it all right
let’s go to the next one and we’re going
to talk about the average
rate of return
versus
actual okay
now stay with me on this
if I had a hundred thousand dollars
today and in year one it averaged a
hundred percent
it’s worth two hundred thousand and then
in year two if it went down fifty
percent it’s worth a hundred thousand
in year three if it went up a hundred
percent
it’s two hundred thousand
and in year four if it went down 50
percent
it’s worth a hundred thousand right
and what that says is I started that 100
four years later was worth a hundred but
if I divided by four my average rate of
return is 25 percent
my actual rate of return is zero
sometimes people buy funds based on
average rates of return not actual rates
of return so it’s important that the
education is there oh boy if this guy
doesn’t give off sales Vibes so I
checked out his website and sure enough
he’s a life insurance salesman and
that’s what he’s pushing here and he
almost got it too he was so close but
and he missed it all right so the last
guys last guy he’s not actually a
Salesman but he puts some interesting
numbers down and so I copied those
numbers and put them into a spreadsheet
so we could take a look and I could
break down exactly where all these
people are totally missing it all right
guys if two Investments both average a
five percent return over three years is
one better than the other well that my
friends all depends on whether you like
making money or not let’s take a look
all right guys investment one and two
both average a five percent return but
they get there differently investment
one is down 39 plus 14 plus 40.
investment two is down only seven plus
ten and plus twelve but the returns are
the same because they both average five
percent right wrong very wrong let’s
assume we started with a hundred dollars
in both of them at the end of year one
you’d have sixty one dollars in
investment one then sixty nine dollars
and you would finish at the end of year
three with ninety seven dollars in
investment two you’ve lost a lot less so
you’re only down ninety three dollars
and then you’re up to 102 and up to 114
and a half significantly different
numbers even though the average return
over the three year period is the same
so what’s the takeaway here you win in
investing by not losing investment two
is clearly better than investment one
because investment one was down 39 in
one year yeah but Taylor no one loses
thirty nine percent in one year
well that’s not true on average retail
investors portfolios are down about 39
in 2022 this is according to JPMorgan
analyst a pretty reputable source so how
do you limit your losses when investing
diversify stocks bonds gold and real
estate own them all
so at least our last friend here wasn’t
trying to sell us some kind of insurance
policy after explaining to us this
incorrect math but one thing that you’re
going to notice is all these guys were
very confident in what they were saying
but they’re totally and completely wrong
on how they’re doing their math so the
example that they use makes sense
mentally and you can actually see the
picture of what they’re talking about
and then you discover like oh okay I
could see how this rate of return this
average rate of return that people are
saying might not be correct in fact
someone argued against me using this
exact same argument like you can’t trust
the S P 500 because any investment that
goes down below zero and comes back up
if we say it has a 10 rate of return and
that is an average over the course of
the lifespan it may not actually be a
positive return right and one of the
examples that was used was this one so
this is the most common example that we
see the person starts off with a hundred
thousand dollars they take a fifty
percent hit now they have fifty thousand
dollars but the next year let’s say they
grow a hundred percent event well it
turns out that 100 of 50 is the original
number because each percentage for that
annualized return is not annualized
against the original number it’s
annualized against the number that you
currently have so 100 gain on fifty
thousand puts you back at a hundred
thousand dollars so now we’re all taught
in school if you add a bunch of numbers
up and you divide it by whatever the
bucket is so in some case if we have you
know four and one year to another year
three another year we would add all
those up and then divide it by the
number of years if you were to do math
that way you discover you have a 25
Total return however
you see that right here if we start with
100 Grand we end with 100 Grand
technically our return is zero and so in
the example before we saw it with the
sales person and the lady that was
writing on the paper we could show a 25
return without actually having any
return and that’s the actual versus
average well it turns out when it comes
to percentages like this this is not how
we calculate averages let’s skip over to
the example by the last guy and I can
show you how to actually calculate the
average correctly all right so I copied
his information so 100 dollars to start
you’re one two and three and then
investment one Roi negative 39 and then
1440 and then the money at the end of
each year we see it goes down here and
it starts to climb but it never actually
gets back to a hundred and then he’s
saying if you add up these numbers here
and then you divide them by the number
of years you know how we’re taught
averages in school you get five percent
now down on investment number two we
have negative seven percent ten percent
twelve percent gains and we can actually
see the the dollar amount drops to
ninety three dollars but then year two
climbs to 102 and then your three climbs
to 114. and now we have a positive
number so we actually made 14 on this
investment and if we were to take the um
rois for each year negative seven plus
ten plus twelve divided by three we also
get five percent so this makes it look
like that taking the averages of
annualized returns doesn’t actually
describe what’s happening with your
money that it’s deceiving if we have a
five percent return we could actually
have lost money in some examples and we
could gain money in other examples the
problem with this is that that’s not how
you calculate averages when it comes to
percentages like this and that’s not how
the financial industry calculates
averages so the first guy who’s sitting
there saying like everybody wants you to
you know be lied to it’s like all a
giant conspiracy or maybe it turns out
that they all knew how to do math
correctly and you totally missed it all
together other so I’m going to show you
how to do this math properly so that you
don’t fall for these sort of like scammy
arguments in order to try and sell you
on an investment that isn’t going to
work all right so the first thing that
we have to realize is that um you can’t
add these numbers up in order to get the
total gains right so averages are adding
the numbers up for each year and then
dividing it by the number of years but
as soon as we add these numbers up and
I’m going to do it right here for you
some of these numbers
we get a 15 total gain what we can tell
right off the bat that adding those
numbers up doesn’t create an accurate
representation between 97 on year three
and a hundred dollars to start we lost
almost three dollars right because it’s
97.36 so we lost almost three dollars
the total return is not 15 percent
ah so because of that adding up
annualized returns doesn’t actually work
so what we have to get is the actual
return right we’ll do the same thing
over here if we sum this up
we see a 15 Total return this one is
closer but still not accurate because
this ends with fourteen dollars and
fifty eight cents a hundred I’m sorry
hundred and fourteen dollars and fifty
eight cents all right so our return
should actually be 14.58 percent that’s
the actual return so neither one of
these represent the actual Total return
all right so what do we have to do to
get the total return we need to figure
out how much money we made it or lost in
between year three and year one so let’s
do that real fast we’ll do that for both
of these all right so by simply taking
the final answer and subtracting our
original dollar amount I’ve discovered
we have negative 2.26 in the first
example and positive 14.58
all right so then the next thing we have
to do is figure out our total rate of
return our total rate of return is this
amount divided by our starting amount
so we’ll add that real quick all right
and that’s pretty easy to tell like we
lost over the course of the last three
years we lost 2.64 cents we can tell
that pretty easily and in the second
example over the last three years we
gained 14.58 so our gain was 14.58
whenever you start with a whole number
like 100 it makes it really easy to
break down exactly what these numbers
should be so you should be capable of
seeing when your math doesn’t work
properly
um pretty quickly when you use a whole
round numbers like a hundred a hundred
thousand Etc like these guys are using
and we could see that our actual rate of
return is on our negative 2.46 percent
on the first example and 14.58 on the
second example now you can divide by the
number of years so we could see
averaging now that we have the total
actual return right so adding the
returns from the previous years doesn’t
create the total that’s what we need in
order to make an average so the actual
total rate of return over this time is
negative 2.64 and we divide that by
three so I’ll do that right here
this number divided by three the actual
rate of return for investment one is
negative point eight eight percent so we
lost almost a percentage a year on
average the second one is again take
this number Total return or total rate
of return divided by the number of years
the other one has a rate of return on
average of 4.86 percent so now you can
see the two averages are actually
different they’re not five percent one
is four point eight six percent and this
is an actual uh an accurate
representation of what the average
return is going to be so it’s amazing to
me that this simple mathematical mistake
not understanding how to take averages
of percentages is impacting so many
people in so many arguments like I said
at the beginning if you’ve been in
personal finance for a minute and you’ve
been watching YouTube or reels on
Instagram or Tick Tock you’ve discovered
that people have probably made this
argument and most of the time people
make this argument they have something
to sell you it’s mostly life insurance
people
but the fact that you have people that
are just so confident in their inability
to do basic math when it comes to these
averages is incredible so when the S P
500 and you know people like our channel
are telling you you can get somewhere
between like 10 and 10 and a half
percent what we’re doing to get that
number is to take this the actual
correct approach to getting these
average returns that’s why on the S P
500 you see it consistently moving
upwards we’re taking where it’s at today
and then we’re figuring out what the
gains are in between today and whenever
we’re starting and then we can figure
out the true rate of return over time
and then divide it by the number of
years and that tells us on average that
we can expect to gain so I hope you
learned something today I hope you have
the tools now to go to uh people who are
making poor mathematical arguments to
try to explain away why you should pay
them a bunch of money
um and now you’re also a little bit more
expert than some of these internet gurus
who are running around sharing incorrect
information so if you learned something
today make sure to like And subscribe I
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