I stumbled upon a website today that provided the following brief explanation about returns:

“To evaluate the performance of a portfolio manager, you measure average portfolio returns. A rate of return (ROR) is a percentage that reflects the appreciation or depreciation in the value of a portfolio or asset”

We measure “average” returns? I don’t think so. Average returns have been shown to have zero value. A classic example: Year 1 +100 return, Year 2 – 50% return, average= (100 – 50) / 2 = 25 percent. Now, let’s use some dollars: start with $100; at the end of year 1 you’re at $200, then at the end of year 2 you’re at $100, meaning zero percent return.

In addition, while there are times when a return will reflect the appreciation or depreciation, once we introduce cash flows, forget about it! Recall that time-weighting can yield funny situations, like having a positive return but losing money.

I guess the lesson is: be careful about what you read on the Internet … may not always be correct.