Here we have the Nutrition “Facts” for orange Tic Tacs, which I pulled from tictac.com. You will see from these “Facts” that Tic Tacs have 0 grams of sugar serving. What if I told you that Tic Tacs are nearly 100% sugar?
As you can see a serving size of Tic Tacs is only 0.49 grams. Per the FDA, as long as a serving size does not include 0.50 grams of sugar, the nutrition facts can be labeled as having zero sugar. Is Tic Tac’s serving size of 0.49 grams intentional? It makes you wonder.
Given there are nearly 40 Tic Tacs in each package, downing an entire package means you probably just consumed close to 20 grams of sugar or the equivalent of a 6 ounce Coca Cola. All from an item that shows 0 grams of sugar on the Nutrition “Facts”. If we can’t trust the Tic Tac label, who can we trust?
A person can drown in a lake that is on average only 2 feet deep. With one hand in the fire pit and one hand in an ice block, on average you should feel ok. On average, nutrition facts are accurate.
When investment returns are interpreted there is a material difference between “average annual return” and “average annualized return”. I’ll explain….
Here we will look at two different sequences of investment returns over 3 years, where we start with $100.
Hey that sucks! We apparently made 16.67% average annual return, but still only have $100 after 3 years. What the heck? Let’s look at sequence number 2:
Hmm, this time we only earned an average annual return of 2.67% but we ended up with more money. Should we prefer earning 2.67% over 16.67%? Nope!
Flashback to your high school math class and remember arithmetic average verse geometric average, that’s essentially the problem we have here. Average annual return is using the arithmetic average, and it’s of no use to you when computing returns (but I have seen it advertised by investment firms in the past). Average annualized return is using the geometric average. It can be more helpful.
If you want to account for cash flows in and out of your portfolio then you should run an internal rate of return calculation. We display both the geometric average and the internal rate of return (IRR) for clients on their performance reports.
As you could have probably guessed, the average annualized rate of return on scenario 1 is 0.00%, and on scenario 2 it is 2.65%.
Be careful out there!
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