Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: Pancho Villa who wrote (4420)	3/9/1998 9:50:00 AM
From: hasbeen101	Read Replies (1) of 18691

Consider however the case of the person retiring 25 years from now. The expected average annual return for the 25 year period is still 12%/year but the law of averages reduces the standard deviation of return (the risk) by a factor of 1/square root(number of years) so the standard deviation for a 25 year period is only 20%/5 = 4%, since the suquare root of 25 is 5. This is why we say people investing for the long term face a lesser amount of risk! Pancho perhaps because you were tired, I believe you made a boo-boo with the math. The 25 year risk would be 20% * 5 = 100%, not 20% / 5 = 4%. To put this in context, the mean return (at 12% p.a. for 25 years) is 1600%. If the standard error is 100%, you have a 65% chance of getting between 1500% and 1700%. You have a 95% chance of getting between 1400% and 1800%. Even though 100% sounds like a lot, in the context of the expected return it is in fact not much. Note however that if we strip-out inflation, and use a long term real return of 9% for equities (this is about as good as it gets in real terms over the long haul), your mean return becomes 762%. The 100% is a bit more significant when comapred with this.

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