I was wrong – Steve E was right

Math isn’t subjective. It’s math. Just because I run a calculation the wrong way and think it’s great, doesn’t mean the calculation is correct. This very event happened not only once, but twice.

The worst part? It was the same stinking concept.

Wait, that wasn’t really the worst part. The worst part is that I had learned the calculation in the first year of my financial planning career. Fast-forward fifteen years. I got it wrong…twice. And the same guy called me out on it both times.

Without any further ado, here’s what happened.

In my “What Rate of Return Should You Expect on Your Investments” post from a couple of years ago, I completely butchered a geometric mean calculation. Wake back-up. This is important. I calculated the arithmetic mean instead. The result was a wrong calculation. Steve E., internet commenter extraordinaire, called me out on it. Frankly, given the fact the post has been viewed hundreds of thousands of times, lots of smart people realized I was wrong. And lots of trusting people assumed that I got the calculation correct.

I corrected the post, updated the numbers, and proceeded with my life. Then I made a video last week which included me saying that I felt that by the end of 2015, “the three-year average return of the S&P 500 would be about 8%.” Um, no. The math didn’t support my case. Yet again I had butchered the geometric mean calculation.

Based on 2015 market performance so far, a flat market at year-end would produce a three-year average return of 14%. Yeah, that’s a big difference.

I could make the argument that I’m a personal finance expert. But I clearly can’t, won’t, or shouldn’t claim to be an investment or math expert.

Details matter – so does integrity. I often say I’m interested in practical solutions more than technical solutions. That’s true, and cute, but I still need to get the technical things right. I’d much rather own my mistakes than bury them.

Thanks, Steve E..

 

Leave a Reply

Your email address will not be published.