Let me ask you the following question: Which stock/fund would you rather own?

• A stock/fund that goes up 100% in year 1, declines 50% in year 2, rises 100% in year 3, and declines 50% in year 4.
• A stock/fund that advances 5% in year 1, 5% in year 2, 5%, in year 3, and 5% in year 4.

On the surface, stock/fund number 1 seems the logical choice. After all, if you take the average of the annual performance numbers, you'll get an average annual return of 25%. (200%-100% divided by 4). On the other hand, stock/fund number 2 only has an average annual return of 5% (20% divided by 4).

Number 1 is the clear choice, right?

Wrong!

Do the math. Let's say you own a stock trading at $10 per share. In year 1, the stock goes up 100%. That stock now trades at $20. In year 2, however, the stock falls 50%. That means the stock now trades at $10. In year 3, the stock rises 100%. That means the stock now trades at $20. In year 4, however, the stock falls 50%. That means the stock now trades at $10. What is your gain for holding the stock over the four-year period? Zero!

On the other hand, a $10 stock that rises 5% per year for four years grows to $12.15 - a 21.5% gain over the four-year period.

The point I'm trying to make is that some performance numbers may not tell the whole story. When an investor, adviser, or mutual fund tries to pass along "average" performance numbers, make sure you understand how those average performance numbers were generated.

The best performance numbers show the actual growth of the investment. In other words, how much would a $100 investment become over a certain time period. After all, that's the only performance that matters to investors.