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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

  • Summit Puri

Mean Median and Mode: How they equate to your finances today

Statistics

Three statistics metrics that you likely remember from school are mean, median, and mode. Mean is the average value amongst the sample, median is the middle value, and mode shows the most repeating value. These are some of the most basic statical measures we’ve learned about and are still used in financial calculations today. Most frequently, we hear of mean or average values when measuring the returns of a portfolio, but has your advisor discussed the geometric mean with you? In today’s article, we’ll discuss how both measures are used to calculate your investment returns and which is most appropriate when looking at your data.

 

Mean and Geometric Mean

I feel the best way to explain these two metrics is to look at an example. Consider the following table, which showcases a hypothetical investor’s portfolio starting with a $100,000 investment. 

 

Year 0

Year 1

Year 2

Year 3

Year 4

Portfolio Value

$100,000

$594,000

$380,000

$194,000

$99,000

YoY Return

 

494%

-36.06%

-48.95%

-48.97%

 

Portfolio value = Dollar value at the end of the year

YoY return = Year over Year return

This portfolio assumes no cashflows in or out

 

Simply looking at the starting and ending balance, deducing a loss of $1,000 would be easy. However, when you take the arithmetic mean of these values, the number may surprise you. The arithmetic mean of the returns above is calculated by adding the returns and dividing by the number of years (periods or n – which you will see as you read on). The calculation would be as follows:

 

(494+[-36.06]+[-48.95]+[-48.97])

4

 

The calculated arithmetic mean shows a return of 90.01% during this 4-year period. It sounds counterintuitive that a portfolio with a 90.01% average return over four years has an ending balance that is less than what was invested. Odd, but this is precisely why we recommend working with your advisor to understand these metrics and when they should be used. Though arithmetic mean is an important statistical measure, let’s look at how geometric mean calculates return and why this metric is important to understand.

 

Geometric Mean

The geometric mean reports the returns as an average of the sample. However, this metric also considers the compounding occurring within the portfolio. We all want our investments to compound every year, and the geometric mean provides visibility as to what the net compounding of the returns looks like. To calculate the geometric mean, we use the formula:




 

As shown in the image above from Financeformulas.net, the calculation for geometric mean seems much more complicated. Let’s calculate this together: 

 

[((1+4.94)(1-.3603)(1-0.4895)(1-.4897))1/4 ] -1 = -0.25%

 

A quarter of a percent loss in the four years is much more palatable and accurate when looking at the data.

 

Key Takeaways

The calculated geometric mean will be lower than the arithmetic mean when the number of periods is more than two and returns from each period differ. In the examples above, we assume an initial investment without further contributions or withdrawals. Most investors will likely add or take funds out of their accounts over time. We use the dollar-weighted return or internal rate of return (IRR) metric to calculate accurate returns while accounting for cash flow. We’ll save that metric for another discussion so we can dive deeper into the associated metrics and calculations.  

 

Financial metrics can get complicated, and as mentioned in previous posts, it isn’t best to only focus on one metric when making decisions. As you learn more, keep in mind that our team of expert financial advisors at Whitaker-Myers Wealth Managers is available to discuss any financial planning needs or questions you may have. Schedule a time to meet with them and help answer your questions!

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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.